WASHINGTON, D.C. 20549
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ICTS INTERNATIONAL N.V.
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those
sections.
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable
Item 2. Offer Statistics and Expected Timetable
Not Applicable
Operations
ICTS International N.V. was registered at the Department of Justice in Amstelveen, Netherlands on
October 9, 1992. ICTS International N.V. and
Subsidiaries (collectively referred
to as
“ICTS” or
“Company") operate in three reportable segments: (a) corporate (b) aviation security and other aviation services and (c) authentication technology. The corporate segment does not generate revenue and contains primarily
non-operational expenses. The airport security and other aviation services business provide security and other services to airlines and airport authorities, predominantly in Europe and the United States of America. The authentication technology
segment provides authentication security services to financial and other institutions, predominantly in the United States of America and Europe.
Selected Financial Data
Selected data set forth below have been derived from the ICTS Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”). The Selected Consolidated Financial Data set forth below should be read in conjunction with Item 5 - Operating and Financial Review and Prospects, the ICTS Consolidated Financial Statements and
the Notes to those Consolidated Financial Statements included in Item 18 in this Annual Report.
The COVID-19 outbreak has developed rapidly in 2020, with a significant number of infections.
The Company is dependent mostly in Europe and the United States of America for its
business on the airline industry. In addition, ICTS is an employee intensive company. As a result of flight restrictions, cancelled flights and quarantine, many employees had to be laid off and / or ordered to stay home, all of which has affected
the Company’s 2020 cash flow. There have been number of Government Assistance programs and
the Company has applied to those that are applicable to its business. In 2020, the United States of America government approved assistance of $13.7 million
for
the Company’s American subsidiary of which $12.7 million were recognized as reduction of labor expenses for the year ended
December 31, 2020. Additional assistance up to $15.9 million was granted during 2021. In the Netherlands, the Dutch
government approved during 2020 assistance up to €17.6 million ($21.6 million as of
December 31, 2020) for
the Company’s Dutch
subsidiaries and additional assistance up to €4.6 million was approved during 2021. The governmental support of both
countries is subject to certain terms and conditions.
The Company’s business plan for the airport security and other aviation services segment, depends on the COVID-19 developments in the foreseen future and the recovery of the airline industry.
In July 2019, AU10TIX Technologies B.V (formerly ABC Technologies B.V., together with its
subsidiaries,
“AU10TIX”, a subsidiary of ICTS issued preferred shares to an investor
for a subscription price of $60 million in cash representing 24% of the outstanding share capital of AU10TIX and 23.077% of the outstanding share capital of AU10TIX on a fully diluted basis. AU10TIX will retain $20 million on the sale proceeds
for general working capital purposes and $40 million were transferred to its parent company, ICTS International N.V.
In July 2019,
the Company repaid $30 million to the entity related to the main shareholder who provided
the Company loans as convertible notes.
In November 2019, AU10TIX issued preferred shares to a new investor for a subscription price of $20 million in cash representing 7.401% of the outstanding share capital of
AU10TIX and 7.143% of the outstanding share capital of AU10TIX on a fully diluted basis.
| |
|
(U.S. dollars in Thousands)
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
Cash and cash equivalents
|
|
$
|
51,602
|
|
|
$
|
52,352
|
|
|
$
|
12,801
|
|
|
$
|
9,073
|
|
|
$
|
3,892
|
|
|
Total current assets
|
|
|
116,554
|
|
|
|
103,136
|
|
|
|
67,219
|
|
|
|
61,982
|
|
|
|
43,908
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|
|
Total assets from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
306
|
|
|
|
853
|
|
|
Total assets
|
|
|
140,388
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|
|
|
123,447
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|
|
|
75,087
|
|
|
|
71,853
|
|
|
|
47,980
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|
|
Total current liabilities
|
|
|
59,334
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|
|
|
75,509
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|
|
|
75,058
|
|
|
|
59,197
|
|
|
|
45,365
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|
|
Total liabilities from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41
|
|
|
|
536
|
|
|
Total liabilities
|
|
|
95,551
|
|
|
|
84,832
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|
|
|
109,943
|
|
|
|
98,595
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|
|
|
81,457
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|
|
Redeemable non-controlling interests
|
|
|
75,322
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|
|
|
74,300
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|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Shareholders' deficit
|
|
|
30,485
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|
|
|
35,685
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|
|
|
34,856
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|
|
|
26,742
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|
|
|
33,477
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|
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|
U.S. Dollars in Thousands
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|
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|
|
|
| |
|
|
|
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2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
248,419
|
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
|
$
|
297,682
|
|
|
$
|
255,576
|
|
|
Cost of revenue
|
|
|
196,569
|
|
|
|
290,461
|
|
|
|
311,994
|
|
|
|
254,728
|
|
|
|
223,486
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|
|
GROSS PROFIT
|
|
|
51,850
|
|
|
|
42,846
|
|
|
|
33,227
|
|
|
|
42,954
|
|
|
|
32,090
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,541
|
|
|
|
5,060
|
|
|
|
3,657
|
|
|
|
2,683
|
|
|
|
2,660
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563
|
|
|
|
-
|
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
37,239
|
|
|
|
33,063
|
|
|
|
34,924
|
|
|
|
26,201
|
|
|
|
21,583
|
|
|
Total operating expenses
|
|
|
43,780
|
|
|
|
38,123
|
|
|
|
40,144
|
|
|
|
28,884
|
|
|
|
24,243
|
|
|
OPERATING INCOME (LOSS)
|
|
|
8,070
|
|
|
|
4,723
|
|
|
|
(6,917
|
)
|
|
|
14,070
|
|
|
|
7,847
|
|
|
Equity Income (loss) from investment in affiliate
|
|
|
(790
|
)
|
|
|
91
|
|
|
|
124
|
|
|
|
-
|
|
|
|
-
|
|
|
Other expenses, net
|
|
|
1,288
|
|
|
|
10,518
|
|
|
|
3,586
|
|
|
|
6,172
|
|
|
|
4,501
|
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
5,992
|
|
|
|
(5,704
|
)
|
|
|
(10,379
|
)
|
|
|
7,898
|
|
|
|
3,346
|
|
|
Income tax expenses
|
|
|
590
|
|
|
|
1,549
|
|
|
|
685
|
|
|
|
2,033
|
|
|
|
1,004
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
5,402
|
|
|
|
(7,253
|
)
|
|
|
(11,064
|
)
|
|
|
5,865
|
|
|
|
2,342
|
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
289
|
|
|
|
95
|
|
|
|
-
|
|
|
NET INCOME (LOSS)
|
|
$
|
5,402
|
|
|
$
|
(7,253
|
)
|
|
$
|
(11,353
|
)
|
|
$
|
5,770
|
|
|
$
|
2,342
|
|
|
Net income (loss) attributable to non-controlling interests
|
|
|
999
|
|
|
|
789
|
|
|
|
(123
|
)
|
|
|
(50
|
)
|
|
|
-
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
$
|
4,403
|
|
|
$
|
(8,042
|
)
|
|
$
|
(11,230
|
)
|
|
$
|
5,820
|
|
|
$
|
2,342
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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BASIC NET INCOME (LOSS) ATTRIBUTABLE TO
ICTS INTERNATIONAL N.V.PER SHARE
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.12
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss)
|
|
$
|
0.12
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares
|
|
|
35,827,854
|
|
|
|
30,524,461
|
|
|
|
23,415,068
|
|
|
|
21,000,000
|
|
|
|
11,518,929
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO
ICTS INTERNATIONAL N.V. PER SHARE
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.11
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
|
Loss from discontinued operations
|
|
- |
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
-
|
|
|
Net income (loss)
|
|
$
|
0.11
|
|
|
$
|
(0.26
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.20
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares
|
|
|
38,424,718
|
|
|
|
30,524,461
|
|
|
|
23,415,068
|
|
|
|
21,000,000
|
|
|
|
11,518,929
|
|
Risk Factors
You should carefully consider the risks described below regarding the business and the ownership of our shares. If any of the risks are realized, our business, financial
condition or results of operations could be adversely affected, and the price of our common stock could decline significantly.
COVID-19
In March 2020, the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, and any related adverse public health
developments, has adversely affected workforces, customers, economies, and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many businesses, including
the Company’s. It is not
possible for
the Company to predict the duration and its effects on the future business or results of operations. Some governmental authorities-imposed restrictions on non-essential activities, businesses suspended travel and popular leisure
destinations temporarily closed to visitors. These conditions have impacted
the Company’s business operations and revenue, as seen with decrease in demand of airport services among the airlines or airports as a result of decline in travel and
reduced or cancelled flights, and adversely affect
the Company’s business.
The Company expects the pandemic to continue having a significant impact on revenue volume during 2021; however, the extent of the impact is uncertain and is largely
dependent on the duration of the pandemic. As a result,
the Company is taking actions to identify additional sources of liquidity and reduce or defer costs thereby maximizing working capital and increasing financial flexibility. These actions
include the reduction of expenses by furloughing a significant portion of
the Company’s workforce and matching the hours worked to the current demand of airport services and the submission of an applications for financial assistance under the
different governments support plans to be used for the continuation of payment of employee wages, salaries and benefits. Due to the unknown length of time of the pandemic,
the Company cannot quantify its potential future effect or the affect in
case goverments will reduce or stop the governmental support.
Labor Concerns
Several of our
subsidiaries operate in many different jurisdictions in Europe, the United States of America and Asia and are therefore subject to the different labor laws of such
jurisdictions. Any changes in such laws, as an example, the establishment or change of minimum wages, could have an adverse effect on the business of
the Company.
In addition, some of our employees are covered by collective bargaining agreements with unions. Such collective agreement detail, inter alia,
financial and non-financial entitlements to our employees that effect our financial results. Relationship with unions, including work stoppages or changes in work rules, could have an adverse impact on our financial results.
In some jurisdictions and subject to legislation related to employees’ entitlements during sickness period, increase in employees’ sick rate could have an adverse impact on our
financial results. Lack of manpower and/or employees’ turnover may lead to additional costs, as an example, recruitment and training cost, and therefore, increase in employees’ turnover rate could have an adverse impact on our financial results.
If any of such changes and/or circumstances have a financial impact on
the Company and
the Company is not able to fully adjust its fees for its services to accommodate such
changes and/or circumstances, of which there is no assurance, there could be a material adverse effect on our business.
Further, escalating costs of providing employee benefits and other labor issues may lead to labor disputes and disruption of our business.
Potential Liability Claims
From time to time lawsuits have been commenced against
the Company or its
subsidiaries, usually claiming injury or damage to property. In addition, labor related issues, as an
example, employee dismissal, may lead to labor disputes. Most of these claims are covered by insurance. In the event such claims are not covered by the insurance, there could be an adverse impact on
the Company.
Our
Contracts with Airports or Airlines may be Cancelled or not Renewed
Our revenues are primarily provided from services pursuant to
contracts, which are cancellable on short notice at any time, with or without cause. We cannot assure you that
existing clients will decide not to terminate our
contracts or fail to renew a
contract. In some jurisdictions and operations,
contracts are subject to a tender detailing,
inter alia, participation terms,
cap pricing and award criteria. Few of
the Company’s
material contracts are expected to be tendered during the years 2021-2022. In addition, consolidation in the airline industry could also result in a loss of customers. Any such termination,
failure to renew a
contract with us and/or failure in tenders, could have a material adverse effect on our results of operations and financial condition. If our relationships with our major customers are impaired, then there may be a material
adverse effect on our results of operations and financial condition. Our major customers include airports in Europe and major airlines servicing the United States of America. The aviation industry might encounter difficulties and this may have a
material adverse impact on our business.
Terrorism, War or Risk of War
Our business is affected by numerous factors outside of our control, such as terrorist attacks and acts of war. Future terrorist attacks against the countries where
the Company
has a presence, rumours or threats of war, actual conflicts involving those countries or their allies, or military or trade disruptions affecting customers may materially adversely affect operations. Our facilities, and equipment could be direct
targets or indirect casualties of terrorist attacks and acts of war. Strategic targets such as high-technology aviation security assets, passenger terminals or aircrafts may be at greater risk of future terrorist attacks than other targets. It is
possible that any, or a combination, of these occurrences could have a material impact on the business of
the Company, on cash flows, results of operations, financial condition, business reputation, claims etc. In addition, insurance premiums for
some or all of our current coverages could increase dramatically, or certain coverages may not be available to us in the future.
Losses from Continuing Operations
The Company incurred income (loss) from continuing operations of $5.4 million, $(7.3) million and $(11.1) million in 2020, 2019 and 2018, respectively.
The Company has a
shareholders’ deficit of $30.5 million and $35.7 million as of
December 31, 2020 and
2019, respectively. If we are unable to obtain new service
contracts, increase revenues, increase profitability and reduce
the Company’s shareholders deficit, our
financial condition and results of operations might be affected and our share price may decline.
Loans from Third Parties
Our financing activities have consisted of loans from banks and other third parties. There is no assurance that those third parties will continue providing loans to
the Company
and even if loans are made, there is no assurance that the terms will be favorable to
the Company.
Key Personnel
Our success largely depends on the services of our senior management and executive personnel. The loss of the services of one or more of such key personnel could have an adverse
impact on our operations. Our success is also dependent upon our ability to hire and retain additional qualified executive personnel. We cannot assure you that we will be able to attract, assimilate and retain personnel with the attributes
necessary to execute our strategy. We cannot assure you that one or more of our executives will not leave our employment and either work for a competitor or otherwise compete with us.
Development of New Technology
As part of our technology business strategy, we develop technological solutions and systems for financial and other industries and seek other revenue producing business and
business opportunities. We cannot assure you that we will be able to develop new systems or develop systems that are commercially viable. Our success in developing and marketing our systems will also depend on our ability to adapt to rapid
technology changes in the industry and to integrate such changes into our systems. We cannot assure you that we will be successful in our attempts to change or implement our business strategy. We may not have the expertise to be successful in
developing our business in areas that are not related to the security industry. We compete in a highly competitive industry and our competitors may be more successful in developing new technology and achieving market acceptance of their products.
Acquiring or Investing in Other Businesses
From time to time,
the Company may seek to acquire or invest in other business, which may or may not be related to the business of
the Company. No assurance can be given that the
Company will acquire or invest in any companies. If
the Company decides to acquire or invest, no assurance can be given that such acquisition or investment will be successful.
Cyber Security Measures
We rely on computer systems and information technology in our business and have established security programs for protection. We might be the target of attempted cyber and other
security threats and despite our security measures, our systems might be vulnerable to interruption or damage from computer hackings, viruses, worms or other destructive or disruptive software, process breakdowns, denial of servicer attacks, social
engineering or other malicious activities or any combination of the foregoing. We must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of unauthorized access,
misuse, computer viruses and other events, that could have a security impact. Insider or employee cyber and security threats are increasingly a concern for all companies, including ours. It is not possible to determine the cost to
the Company in
the event of a cyber security incident as that will depend on the size and nature of the incident.
Competition
Competition in the aviation security and aviation related services industry as well as in the technology industry is intense. Many of our competitors have greater financial,
technical and marketing resources. Our competitors might develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we develop. If our
competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality, which are more cost effective than those developed by our competitors, we may not be able to
achieve market acceptance of our systems.
Operations in International Environments Risk
The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic
and/or political instability and trade restrictions). Such risks can cause
the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on
the Company's
consolidated financial position, results of operations and cash flows.
Governmental Regulation
Industries on which we operate, are subject to extensive governmental regulation, the impact of which is difficult to predict. The Aviation and Transportation Security Act (the
"Security Act") has had a significant negative impact on our aviation security business in the USA. In addition, our ability to successfully market new systems will be dependent upon government regulations over which we have no control. Any
existing or new regulation may cause us to incur increased expenses or impose substantial liability upon us. The likelihood of such new legislation is difficult to predict.
Legislation Designed to Protect Privacy Rights
From time to time, personal identity databases and technologies utilizing such databases have been the focus of organizations and individuals seeking to curtail or eliminate the
use of personal identity information technologies on the grounds that personal information and these technologies may be used to diminish personal privacy rights. In the event that such initiatives result in restrictive legislation, the market for
our products may be adversely affected. In addition, in the event that
the Company fails as a result of legislation designed to protect privacy rights, the market for our products may be adversely affected.
Licenses for Operations
A license to operate is required from the airport authority in the airports in which we currently operate. The loss of, or failure to obtain, a license to operate in one or more
of such airports could result in the loss of, or the inability to compete for,
contracts in the airports in which we have licenses.
Poor Economic Conditions
Poor economic conditions could adversely affect our business. Deterioration in the global economic environment may result in decreased demand for our services. Weakening economic
conditions could also affect our customers, which may result in redirection of their request for our services.
Currency Risk
A substantial portion of our revenue is generated in foreign countries. We generally retain our income in local currency at the location the funds are received. Since our
financial statements are presented in United States dollars, any significant fluctuation in the currency exchange rate between such currency and the United States dollar would affect our results of operations and financial condition.
Limitations in Price Share
The market price of our common stock may from time to time be significantly affected by a large number of factors, including, among others, variations in our operating results,
the depth and liquidity of the trading market for our shares, and differences between actual results of operations and the results anticipated by investors and securities analysts. Many of the factors which affect the market price of our common
stock are outside of our control and may not even be directly related to us. The market price of our common stock may be volatile, which may make it more difficult for you to resell your shares when you want at prices you find attractive.
Main Shareholders
As of May 1st, 2021, the MacPherson Trust, its beneficiaries and Mr. M.J. Atzmon, own or control together approximately 76.6% of our issued and outstanding common
stock (excluding conversion rights). As a result of such ownership and conversion rights, the MacPherson Trust together with Mr. Atzmon are able to significantly influence and / or control all matters requiring shareholder approval, including the
election of directors and approval of significant corporate transactions. Such concentration may also have the effect of delaying or preventing a change in control. Mr. Atzmon, the Chairman of the Supervisory Board, disclaims any benefit or
interest in the MacPherson Trust. Their interests could conflict with yours. In addition, significant sales of shares held by them could have a negative effect on our stock price.
Dividends
We do not expect to pay any cash dividends on our common stock in the foreseeable future.
The Ability of Shareholders to Bring Action or Enforce Judgments Against the Company, the Managing Directors and the Supervisory Directors may
be Limited Since ICTS is a Foreign Company
The ability of shareholders of ICTS (Shareholders) to bring actions against ICTS, the members of the management board of ICTS (Management Board and its members Managing
Directors) and the members of the supervisory board of ICTS (Supervisory Board and its members Supervisory Directors) or to enforce liabilities predicated upon non-Dutch laws may be limited.
The Company is a public company with limited liability (naamloze vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands. The
corporate affairs of ICTS are governed by the
articles of association of ICTS (the
Articles of Association) and by the laws governing companies incorporated in the Netherlands. Significant number of ICTS’ assets and activities are located outside
the United States of America. In addition, Managing Directors and some of the Supervisory Directors are residents of countries other than the United States of America.
The United States of America and the Netherlands currently do not have a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitration
awards, in civil and commercial matters. In addition, the countries of residence of the Managing Directors, the Supervisory Directors and of
the Company's employees may also not have a treaty providing for the reciprocal recognition and
enforcement of judgments. Consequently, a final judgment for payment given by a court in the United States of America, whether or not predicated solely upon US securities laws, would not be enforceable in the Netherlands. Accordingly, a final
judgment for payment rendered by a court in the United States of America, whether or not predicated solely upon US securities laws, will not be recognized and enforced by the Dutch courts. However, if a person has obtained a final and conclusive
judgment for the payment of money rendered by a court in the United States of America which is enforceable in the United States of America and files his claim with the competent Dutch court, the Dutch court will generally give binding effect to
such foreign judgment insofar as it finds that (i) the jurisdiction of the US court has been based on a ground of jurisdiction that is generally acceptable according to international standards, (ii) the judgment by the US court was rendered in
legal proceedings that comply with the standards of the proper administration of justice that includes sufficient safeguards (behoorlijke rechtspleging) and (iii) the judgment by the US court is not incompatible with a decision rendered between
the same parties by a Dutch court, or with a previous decision rendered between the same parties by a foreign court in a dispute that concerns the same subject and is based on the same cause, provided that the previous decision qualifies for
acknowledgement in the Netherlands and except to the extent that the foreign judgment contravenes Dutch public policy (openbare orde). It is uncertain whether this practice extends to default judgments as well. Dutch courts may deny the
recognition and enforcement of punitive damages or other awards. Moreover, a Dutch court may reduce the amount of damages granted by a US court and recognize damages only to the extent that they are necessary to compensate actual losses or
damages. Enforcement and recognition of judgments of US courts in the Netherlands are solely governed by the provisions of the Dutch Civil Procedure Code (Wetboek van Burgerlijke Rechtsvordering).
ICTS is a Dutch Public Limited Liability Company. The rights of the Shareholders may be Different from the Rights of Shareholders in Companies Governed by
the Laws of US Jurisdictions.
The rights of Shareholders and the responsibilities of Managing Directors and Supervisory Directors may be different from the rights and obligations of shareholders in companies
governed by the laws of US jurisdictions. Such differences include, among others, voting requirements for important shareholder resolutions regarding capital measures, corporate reorganizations and certain shareholder rights, such as assertion of
liability claims. In the performance of its duties, the Management Board and Supervisory Board are required by Dutch law to consider the interests of
the Company, the Shareholders, its employees and other stakeholders, in all cases with due
observation of the principles of reasonableness and fairness. It is possible that some of these parties will have interests that are different from, or in addition to, the interests of the Shareholders.
ICTS is a public limited liability company organized under the laws of The Netherlands in 1992. Our offices are located at Walaardt Sacréstraat 425-5, 1117 BM Schiphol-Oost, The
Netherlands and its telephone number is +31-20-347-1077.
Aviation Security and Other Aviation Services Business
In the wake of the events which occurred on
September 11, 2001, the Federal Government of the United States of America, in November 2001, enacted the Security Act Public Law
107-71. Under the Security Act, entities may provide aviation security services in the United States of America only if they are owned and controlled at least 75% by U.S. citizens. As a company organized under the laws of the Netherlands, ICTS is
not able to comply with the ownership requirements under the Security Act. The Security Act is administered through the Transportation Security Administration (
“TSA”).
In the fourth quarter of 2002, pursuant to the Security Act, the Federal government through the TSA, took over substantially all of the aviation security operations in U.S.
airports. As a result, ICTS, through its wholly-owned subsidiary, Huntleigh USA Corporation (“Huntleigh”), provides limited aviation security services in the United States of America.
In 2001 and 2002, ICTS sold substantially all of its European operations in two stages, for an aggregate purchase price of $103 million. As a result of the sale, ICTS fully
divested itself at that time from its European operations, except for its operations in the Netherlands and Russia.
In February 2005
the Company decided to re-enter the European aviation security market. In March 2005,
the Company established a wholly owned subsidiary, I-SEC International
Security B.V. and
Subsidiaries (
“I-SEC”), under which all the European aviation security activities provided by ICTS are operated. Since then I-SEC established new
subsidiaries throughout Europe and the Far East.
Authentication Technology Business
Our technology business is primarily involved in the services of authentication security to financial and other institutions, mainly in the United States of America and Europe.
Business Overview
General
ICTS provides the following services through its
subsidiaries as follows:
I-SEC supplies aviation security services at airports in Europe and the Far East.
Huntleigh provides mostly non-security aviation related services in the United States of America.
AU10TIX develops technological systems and authentication solutions for financial and other institutions.
Business Strategy
We are currently pursuing the following business strategy:
Aviation Security and Critical Infrastructure Operations in Europe and the Far East
Through the I-SEC
subsidiaries, we supply aviation and other high-end security services to airports, airlines, governments and critical infrastructure facilities in Europe and
the Far East. Currently, I-SEC provide aviation security services to three out of the five biggest airports in Europe. I-SEC is focusing on the critical infrastructure operations in the countries where we are present, next to our core business
(airports, airlines, cargo). I-SEC is continuously looking for ways to extend its operations in new and existing locations.
Other Aviation Related Services in the U.S.
Through Huntleigh, we provide limited security services and non-security aviation related services in the U.S. Huntleigh is continuously looking for ways to extend its operations
in new and existing locations.
Developing Authentication Technologies
Through AU10TIX, we are focusing on developing authentication technologies in order to provide authentication services to financial and other markets all over the world. AU10TIX
is continuously looking for ways to extend the services it provides, both to new and existing customers.
Services
Services Offered in Europe and the Far East
I-SEC specializes in the provision of advanced aviation security services worldwide. These include security consulting and security handling: security screening, checkpoint
screening, cargo screening, hold baggage screening (“HBS”), X-ray operator training and integrated services.
The Company benefits from the broad know-how and international operational experience it has acquired in more than two decades of intensive activity in the field of aviation
security.
I-SEC's management and key personnel are widely recognized in the industry as developers of pioneering aviation security concepts, methods and technologies, focusing on airport
security and on high-risk environments. With its highly skilled and experienced professional staff, supported by proprietary technological innovations, I-SEC is ideally positioned to deliver cost-effective aviation security solutions and services
to airlines and airports with varying operational volumes and needs.
I-SEC has operations in The Netherlands, Germany, Spain, Denmark, Italy, and Sweden, and is continuing to expand to other countries in Europe. Additionally, I-SEC currently
operates at the five major airports in Japan and Joint Venture with local partner in Korea providing aviation security and training to airlines.
Building on its management's strong reputation and on its broad know-how and experience, I-SEC is committed to provide its clients with security services at the highest
professional level, while offering unprecedented cost savings, due, in part, to the integration of advanced, proprietary technologies.
I-SEC Aviation Security Services
Checkpoint Screening
I-SEC provides trained checkpoint operators and supervisors to airline and airport clients in many countries.
The Company trains its staff to perform passenger screening at checkpoints, both efficiently and effectively, fully complying with international and national regulatory
requirements on the one hand, and focusing on hospitality customer service requirements, on the other hand.
Hold Baggage Operation (HBS)
Regulatory agencies in Europe and the USA require airlines and airports to perform 100% hold baggage screening. I-SEC provides the trained manpower required to carry out these
tasks, as well as training services for the airport's own staff.
Integrated Services
I-SEC provides a wide variety of integrated services, combining security with customer service. These integrated services which combine security processing based on numerous
years of experience and expertise, fully complying with all local, national and international regulatory requirements, with a wide variety of customer service functions, enables airlines to improve customer services while reducing manpower needs
and operational costs.
Passengers Security Screening
I-SEC's unique passenger screening method, has been upgraded several times, and adapted to comply with amendments in regulatory requirements, as well as with changes in the
threat environment and developing needs.
Passenger privacy and confidentiality are strictly maintained at all times, in accordance with all relevant regulations issued by both US and EU regulators.
Cargo Security
I-SEC provides a range of services that focuses on cargo security.
Security program implementation: Planning and implementation of a cargo security program; training the client's staff and management team.
Staff training: Training the client's employees to operate in accordance with the relevant security requirements, while maintaining flexibility with regard to course content,
scope, duration, location and the number of trainees.
I-SEC Aviation Security Training Services
Training Programs and Seminars
I-SEC's training programs are the product of over 25 years of expertise and experience in the development of training materials covering every aspect of airline and airport
security operations and their implementation worldwide.
Aviation security and security awareness training courses are offered, within the framework of training programs that are modular in nature, and are adapted to meet the specific
needs of each client. The courses are constantly being updated to ensure that they cover all relevant material relating to new regulations, new threats, etc. Many of the courses include simulations, role play, situational exercises, case studies
and on job training. Sophisticated training aids are employed to make the training experience more efficient and interesting, thus ensuring optimal results.
I-SEC Aviation Security Consulting Services
Risk Analysis
A comprehensive risk analysis is the essential, primary component of any security system. The identification of the risks relevant to the particular site or operation, and their
grading according to their potential damage and probability enables to develop the security concept and design the security system that will effectively deal with these risks.
I-SEC employs security experts specializing in the performance of risk analyses in a variety of threat environments. When analysing risks, all relevant factors relating to the
client, the operation, the environment, and potentially hostile elements are taken into account, to ensure the risks are fully and accurately mapped.
Security Concept Development
In order to enable the development of a cost-effective security system, that optimally meets the client's specific needs, an aviation security system must be constructed on the
basis of a well-thought-out security concept, which takes into consideration all relevant aspects and variables.
As the development and implementation of a comprehensive security system requires substantial resources, it is crucial that these be invested in the most productive way, in
accordance with predetermined priorities.
When developing the aviation security concept, I-SEC specialists take into account the results of the risk analysis and the developing and anticipated changes and trends in the
threat environment, to arrive at a concept that will be suitable for the predictable future, and easy to adapt in later years.
Security System Design
I-SEC security experts possess broad experience in the design and development of modular, aviation security systems, customized to meet local needs and complying with
international standards. Designed systems are both flexible and dynamic in nature, ensuring that any adaptations required to meet changes in the threat environment in the future can be carried out quickly, with minimal investment of effort and
funds.
System development also covers the definition of needs in the areas of manpower, technical means and advanced technologies, with the aim of attaining the optimal balance, thus
maximizing both efficiency and savings in operational and staffing costs. Our experts also assist the client to determine priorities in implementation, as a function of the prioritized needs and the available resources. Assistance in the
recruitment of security managers and staff based on predefined standards is also offered.
Implementation and Assimilation
For over two decades, I-SEC specialists have been assisting their clients to implement and assimilate proven work methods and security solutions designed on the basis of
extensive know-how and experience, and tailored to meet their specific needs.
The client's staff members, at all levels, are trained to perform their relevant tasks, and are provided with ongoing consulting and support to ensure the smooth running of
security operations.
Security Surveys and Audits
I-SEC's expert security consultants specializes in the performance of airports security surveys, the scope of which is determined together with the client, and can range from
individual aspects of airport security to comprehensive, all-encompassing surveys.
Special attention is focused on verification of compliance with all applicable regulations and presentation of recommendations regarding any amendments that may be required.
Security surveys are particularly important as a step in the upgrading of an existing system – only by accurately mapping the existing system, all its components, strengths and weaknesses, is it possible to determine the required modifications.
As security systems are only effective if they continue to address existing and anticipated threats, and to fully comply with international, national and local regulatory
requirements, periodical aviation security audits are of vital importance. I-SEC experts possess vast international experience in the performance of such audits, and recommending steps that must be taken to ensure full compliance and suitability of
the aviation security system at all times.
Explosive Detection Dog Handling
In 2021 I-SEC acquired a dog handler company in Sweden specialized in the detection of Bed Bugs (BDD) for hotels and similar. Next to the current business in BDD I-SEC will
invest and implement an Explosive Detection Dog Handling organization based in Sweden that can support the group.
Critical Infrastructure
I-SEC was awarded a
contract of guarding a critical infrastructure plant in The Netherlands, as a result of our scope to focus on additional security fields in addition to the
aviation-oriented businesses (airports, airlines and cargo). Aim is to focus next to our core business (airports, airlines, cargo) on the critical infrastructure operations in the countries where we are present.
Aviation Security Technology
In the interest of enabling its client to maintain the required level of security while reducing operational costs, I-SEC utilizes several innovative, proprietary means.
NAPS (New Advanced Passenger Screening)
NAPS is a sophisticated IT-system that enables pre-departure analysis of passenger information and is designed to help screen airline passengers in a faster and more efficient
manner. It was developed based on the extensive experience and knowledge accumulated by
the Company’s professionals and in accordance with European and US regulations, furthermore, the tool was updated recently to capture the new privacy
regulations.
I-Check
Extremely fast and accurate travel document scanner. The I-Check document scan stand, together with the I-Check tablet app, turns a tablet into an extremely fast and accurate
passport and barcode scanner. Once the I-Check tablet app is connected to the I-Check infrastructure, a wide variety of functionalities becomes available guiding the security agent and supervisors intuitively through the features and functionality.
SARA (Security Airport Realtime Application)
SARA gathers information out of multiple sources and presents them on a portable device or in any browser. SARA is a tool that provides the missing link between HR and the
operational daily business of running a security operation. SARA allows you to make an operational environment paperless. You can create, sign update forms on the fly while viewing a live overview of the security situation. Employees can be tracked
on their trainings, certifications and overall performance. A comprehensive chat and task system is part of the SARA-suite.
ROM (Realtime Operational Management)
ROM transforms rigid and difficult day to day planning into flexible and structured planning. Through utilization of the OPS-system, we can create a roster a week, a month or
even a year in advance, which ideally should be as accurate as possible. In a turbulent environment like an airport, the daily dispatch efficiency of your workforce is paramount to your operation.
Services Offered in the United States of America
As of
December 31, 2020 Huntleigh, provides limited aviation security services and other separate services at approximately 29 airports in 21 states.
The limited security services provided by Huntleigh involve the following:
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Private Charter Flight Screening for Airlines - which includes security check of passengers' body andcarry-on items.
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Cargo Security Screening – for some international and domestic carriers.
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Catering Security Screening – for some international and domestic carriers.
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Aircraft Security Screening – for some international and domestic carriers.
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Aircraft Search – search of the entire aircraft to detect dangerous objects.
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Each of the non– security services involve one of the following specific job classifications:
Agent Services for Airlines
Agent services include: passenger service, vendor behind counters, passenger service representative (PSR) and baggage service (BSO). Although an agent is a Huntleigh employee,
the employee is considered a representative of specific airlines.
Guard Services
Guard services involve guarding secured areas, including aircraft. Huntleigh also provides guard services to schools, places of worship, HOA’s, events, etc. In addition,
Huntleigh is offering and providing camera security monitoring services.
Queue Monitors
Huntleigh provides queue monitors assisting passengers before the checkpoint.
Aircraft Cleaning
Huntleigh provides employees who perform aircraft cleaning services such as the following:
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Cleaning the aircraft interior
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Conducting cabin searches
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Waxing the aircraft exterior
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Janitorial
Huntleigh provides janitorial services to airline airport offices, airline terminal areas, airline gates, police stations and office buildings.
Shuttle Service
Huntleigh provides shuttle services to airline crews between hotels and airports.
Skycap Services Provider
A skycap assists passengers with their luggage. Located at the curb side of the check-in at airports, a skycap checks in passengers' luggage and meets security requirements
established by the TSA to screen passengers. A skycap also assists arriving passengers with transporting luggage from the baggage carousel to ground transportation or other designated areas.
A skycap also may transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring the baggage carousel to ensure that
passengers do not remove luggage not belonging to them.
Wheelchair Attendants
Wheelchair attendants transport passengers through the airport in airline and/or Company owned wheelchairs and may also operate electric carts for transporting passengers through
the airport. Working closely with the attendants are dispatch agents who monitor requests and assignments for wheelchairs and dispatch the attendants as needed utilizing various wheelchair dispatch technologies.
Baggage Handling Services
Huntleigh provides employees who move passengers’ baggage from the check- in counter to screening machines and/or vice versa, as well as moving oversized baggage from check-in to
appropriate bag belts.
VIP Meet and Greet Services
Huntleigh provides VIP meet and greet services of assisting passengers with the transition through the airport on arrival and / or departure.
Equipment for Passengers with Restricted Mobility
In December 2019, Aviation Mobility Solutions Inc. was formed to find, evaluate and deliver new and innovative products for passengers with restricted mobility.
Authentication Systems and Solutions
AU10TIX, an identity management company, is on a mission to obliterate fraud and further a more secure and inclusive world.
The company provides critical, modular solutions to
verify and link physical and digital identities so businesses and their customers can confidently connect. Over the past decade, AU10TIX has become the preferred partner of major global brands for customer onboarding and customer verification
automation—and continues to work on the edge of what’s next for identity’s role in society. AU10TIX’s proprietary technology provides results in less than 8 seconds, enabling businesses to onboard customers faster while preventing fraud, meeting
compliance mandates and, importantly, promoting trust and safety.
Product & Technology
AU10TIX’s modular SaaS offering for identity verification and fraud prevention automates the capture, authentication and content retrieval from physical ID documents. AU10TIX
speeds up customer screening and enrollment while enhancing security and ID fraud prevention with 100% automated (i.e., no data entry or back-office dependencies) forensic-level forgery, counterfeiting and risk factor detection and higher
conversion rates of borderline quality images. AU10TIX technology handles all of this along with data-rich, fast-response exception reporting and multi-lingual document content support while providing rapid processing (typically 8 seconds or less
for the complete verification process).
AU10TIX technology is designed for security-sensitive and business-sensitive environments such as airports, border control, financial services, etc. which require hi-resolution
document imaging, auto image optimization, auto-classification of documents up to version level, extraction of readable + encoded content including MRZ lines and barcodes. The automated technology provides real-time cropping of face photograph,
multi-factor identity authentication), immediate detailed exception alerts, ability to integrate with chip readers and barcode readers, ability to integrate with biometric inputs, and ability to query date against databases or watch-lists.
AU10TIX’s core engine along with new products like SECURE.ME, a white label identity verification experience, automates all essential components of customer onboarding and KYC
initiation in regulated markets including ID document authentication, face matching (typically Selfie-to-ID with additional use cases possible), Proof-Of-Address processing and identity data verification and screening (eIDVS).
AU10TIX enables fully automated ID image recognition and optimization, pre-screening, content retrieval, forgery, counterfeiting and collateral risk flag detection, and exception
reporting. Clients are also offered SDK packages to improve and control ID and face image capturing by customers.
Another component is Selfie-to-ID face matching with liveness detection. These features increase strength of risk detection and fraud deterrence and offer replacement to manual
video conversations.
This portfolio of services enables service providers to rapidly automate customer onboarding and AML/ATF/KYC processes.
AU10TIX incorporates advanced AI algorithms that increase the accuracy of analyzing images at a broad range of image quality levels for various types of official ID documents.
The system is designed to handle images that originate from any common imaging device including mobile phones, tablets, computer webcams, etc.
AU10TIX is relevant for a variety of commercial and government markets many of which are required to comply with KYC regulations. The technology can be integrated with additional
Identity Data Verification and Screening (eIDV/eIDVS) as a client or 3rd party augmented service or seamlessly integrated into AU10TIX’s ID authentication and POA handling components, enabling automated submission of customer data to the required
person and address verification services, as well as screening services such as PEPs & Sanctions, watchlists, etc. through a single API call.
Target Markets
Key markets for AU10TIX are financial services including banking, insurance, payments, wallets, money transfer, lending, remittance, online investments, trading and forex,
cryptocurrency exchanges, rental services, sharing economy, professional services, telecommunications and social media, etc.
Investments
Artemis Therapeutics, Inc.
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
The Company evaluated the stock price of ATMS but as ATMS share price is low, the number of shares that are being traded is low, and as ATMS still does not have any revenue, the
Company determined that the value of the investment is impaired and accordingly, valued the investment at zero.
Freezone I-SEC Korea Inc.
In April 2018,
the Company signed a Joint Venture Agreement with a South Korean Company in order to establish a Joint Venture Company (
“JVC”) and to provide aviation security and
non-security services in South Korea. Each one of the parties holds 50% (fifty percent) of the JVC’s equity.
The Company uses the equity method for this investment. As of
December 31, 2020,
the Company’s investment is 333 million KRW ($0.3 million
as of
December 31, 2020). For the years ended
December 31, 2020,
2019 and
2018,
the Company recognized a profit (loss) in its consolidated statements of operations of (18) million KRW, 105 million KRW and 134 million KRW, respectively ($(0), $0.1
million and $0.1 million as of
December 31, 2020,
2019 and
2018, respectively) from its investment in the JVC.
Mesh Technologies, Inc.
In January 2019,
the Company invested an amount of $0.1 million in Mesh Technologies, Inc. (
“Mesh”), a company incorporated in the USA. As of
December 31, 2020, the investment
represented less then 1% of the issued and outstanding share capital of Mesh. Mesh is a technology company providing cross border payments technology by innovating on the existing payment rails of established card networks available in the market.
As Mesh is a private, closely held company, there is no active market for this investment. Therefore,
the Company measures the investment at cost minus impairment.
Arrow Ecology & Engineering Overseas (1999)
In December 2019,
the Company invested an amount of $1.8 million in Arrow Ecology & Engineering Overseas (1999) Ltd (
“Arrow”), a limited company incorporated in Israel. Arrow
develops and operates a sustainable green process to recycle mixed and sorted municipal solid waste.
The Company purchased few types of shares representing 23.3% of Arrow’s equity for an amount of $0 million and shareholders loans were purchased
for a price of $1.7 million ($4.1 million stated value less $2.4 million allowance for credit losses, which have not changed since the acquisition).
The Company uses the equity method for this investment. During the years ended
December 31, 2020
and
2019,
the Company recognized its estimated share in Arrow loss in the amount of $0.8 million and $0, respectively, from this investment.
The Company has an agreement with an entity related to its main shareholder, according to which, if the value of the investment decrease, the related party entity has guaranteed
to repurchase this full investment at a minimum amount of $1.8 million. The guarantee is effective immediately as of the date of purchase and terminates after three years. Some Directors and managers of Arrow are related parties of
the Company.
GreenFox Logistics LLC.
In March 2020,
the Company invested an amount of $0.1 million in GreenFox Logistics, LLC. (
“GreenFox”), a company incorporated in the USA. The investment was done as SAFE
investment (Simple Agreement for Future Equity). GreenFox is an on-demand delivery/moving/transportation company. As GreenFox is a private, closely held company, there is no active market for this investment. Therefore,
the Company measures the
investment at cost minus impairment.
SardineAI Corp.
In August 2020,
the Company invested an amount of $0.1 million in SardineAI Corp (
“SardineAI”), a company incorporated in the USA. In return
the Company received preferred shares
representing less then 1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service (FaaS) platform for Digital businesses to detect frauds and financial crimes. As SardineAI is a private, closely held company, there is no active market for
this investment. Therefore,
the Company measures the investment at cost minus impairment.
Revenue
Revenue generated from customers by geographical area based on the geographical location of the customers invoicing address is as following:
Revenue in Germany
Our revenue in Germany during the years 2020, 2019 and 2018 totaled $119.5 million (48% of total revenue), $137.2 million (41% of total revenue) and $134.6 million (39% of total
revenue), respectively.
Revenue in the Netherlands
Our revenue in The Netherlands during the years 2020, 2019 and 2018 totaled $58.4 million (24% of total revenue), $97.7 million (29% of total revenue) and $121.5 million (35% of
total revenue), respectively.
During the year ended
December 31, 2018, Procheck was advised by its only customer, that its services are not required, its
contract would not be renewed and would end on
December 31, 2018, following a change in the governmental security concept in the Netherlands. Procheck revenues during the years 2020, 2019 and 2018 totaled $0 million (0% of total revenue), $0 million (0% of total revenue) and $24.0 million (7%
of total revenue), respectively.
Revenue in the U.S.
Our revenue in the United States of America during the years 2020, 2019 and 2018 totaled $45.3 million (18% of total revenue), $73.7 million (22% of total revenue) and $69.5
million (20% of total revenue), respectively.
Revenue in Other Locations
Our revenue in other locations during the years 2020, 2019 and 2018 totaled $25.2 million (10% of total revenue), $24.7 million (8% of total revenue) and $19.6 million (6% of
total revenue), respectively.
Major Customers
Revenue from two customers represented 70% of total revenue during the year ended
December 31, 2020, of which one customer accounted for 48% and the other customer accounts for
22% of total revenue. Accounts receivable from these two customers represented 47% of total accounts receivable as of
December 31, 2020.
Revenue from two customers represented 69% of total revenue during the year ended
December 31, 2019 of which one customer accounted for 41% and the other customer accounts for
28% of total revenue. Accounts receivable from these two customers represented 57% of total accounts receivable as of
December 31, 2019.
Revenue from two customers represented 72% of total revenue during the year ended
December 31, 2018 of which one customer accounted for 38% and the other customer accounts for
34% of total revenue. Accounts receivable from these two customers represented 55% of total accounts receivable as of
December 31, 2018.
Both customers mentioned above, have been the same principle customers in the last three years.
Competition
Competition in the aviation security and aviation related services industry as well as in the technology industry is intense. Many of our competitors have greater financial,
technical and marketing resources. Our competitors might develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our
competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality, which are more cost effective than those developed by our competitors, we may not be able to
achieve market acceptance of our systems.
Aviation Security Regulatory Matters
Our aviation security activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction in the serviced area. The
Company, on behalf of its clients, is responsible for adherence to such regulations relating to certain security aspects of their activities.
The Company is also responsible to prevent passengers without proper travel documentation from boarding a
flight, thereby avoiding fines otherwise imposed on its clients by immigration authorities. We are subject to random periodic tests by government authorities with regard to the professional level of its services and training. Any failure to pass
such a test may result in the loss of a
contract or a license to perform services or a fine or both. In the airports in which we operate, a license to operate is required from the respective airport authority.
The Company currently holds the
licenses required to operate in such locations.
Climate Change Regulation
Our business is not affected directly or indirectly in any way by existing and pending, local, state, regional, federal or international legal requirements and agreements related
to climate change.
Organizational Structure
I-SEC Global Security B.V. (The Netherlands - 100%) and its wholly-owned
subsidiaries:
I-SEC International Security B.V. (The Netherlands - 100%), which holds the shares of:
I-SEC Nederland B.V. (Netherlands - 100%)
I-SEC Advanced Systems B.V. (Netherlands - 100%)
I-SEC Spain Services Management S.L. (Spain - 100%)
I-SEC Spain Security Management S.L. (Spain - 100%) which holds the shares of:
I-SEC Aviation Security S.L. (Spain – 100%)
I-SEC Italia s.r.l. (Italy - 100%), which holds the shares of:
I-SEC Services Italia s.r.l. (Italy – 100%)
I-SEC Japan K.K. (Japan - 100%)
I-SEC Denmark A/S (Denmark – 100%)
I-SEC Security Services GmbH (Germany – 100%)
I-SEC Aviation Security A.B. (Sweden – 100%)
I-SEC German Holding B.V.* (Netherlands – 100%) which holds the shares of:
I-SEC German Special Operations B.V. (Netherlands – 100%) which holds the shares of:
I-SEC Security Services GmBH (Germany 100%)
I-SEC German Aviation Holdings 1 B.V. (Netherlands – 100%) which holds the shares of:
I-SEC Verwaltungs SE** (Germany – 100%)
Freezone I-SEC Korea Inc (South Korea – 50%)
ICTS USA, Inc. (New York - 100%) which holds the shares of:
Huntleigh USA Corporation (Missouri, USA - 100%)
Aviation Mobility Solutions, Inc (Texas, USA – 100%)
AU10TIX Technologies B.V. (The Netherlands – 69%, formerly ABC Technologies B.V) which holds the shares of:
AU10TIX Limited (Cyprus – 100%) which holds the shares of:
AU10TIX B.V. (The Netherlands – 100%) which holds the shares of:
10TIX Authentication and Identification Advanced Systems Ltd. (Israel – 100%), which holds the shares of:
AU10TIX Services, Inc (Texas, USA – 100%)
*I-SEC German Holding B.V. is a limited partner (100%) of I-SEC Deutsche Luftsicherheit SE&Co.KG (Germany).
** I-SEC Verwaltungs SE is a general partner (0%) of I-SEC Deutsche Luftsicherheit SE&Co.KG (Germany).
Property, Plant and Equipment
The Company leases certain premises under various operating leases. Maturities of operating lease liabilities as of
December 31, 2020 were as follows (in millions):
| Year ended
December 31, |
|
|
|
|
|
|
|
$
|
4.0
|
|
|
2022
|
|
|
3.1
|
|
|
2023
|
|
|
2.7
|
|
|
2024
|
|
|
2.2
|
|
|
2025
|
|
|
1.0
|
|
|
Thereafter
|
|
|
1.4
|
|
| |
|
$
|
14.4
|
|
Rent expense for the years ended
December 31, 2020,
2019 and
2018 is $5.5 million, $4.4 million and $5.0 million, respectively.
Item 5. Operating and Financial Review and Prospects
This section contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial
condition. All statements other than statements of historical facts included in this annual report on Form 20-F regarding ICTS's strategy, future operations, financial position, costs, prospects, plans and objectives of management are
forward-looking statements. When used in this annual report on Form 20-F the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", and similar expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for
a number of important reasons, including those discussed under "Risk Factors" and elsewhere in this annual report on Form 20-F.
We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 20-F represent
management's expectations as of the date of this annual report on Form 20-F and should not be relied upon as representing ICTS's expectations as of any other date. Subsequent events and developments will cause management's expectations to change.
However, while we may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to do so, even if its expectations change.
Overview
The Company operates in three reportable segments (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not
generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provide security and other services to airlines and airport authorities, predominantly in Europe and the United States of
America. The authentication technology segment is predominantly involved in the development and sale of authentication security software to financial and other institutions, predominantly in the United States of America and Europe. All
inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of
the Company as a whole.
Critical Accounting Policies
The consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with US GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the use of judgment and estimates are: (a) going concern assessment and (b) deferred taxes valuation allowance. Please refer to Note
2 of ICTS’s consolidated financial statements included in this Annual Report for the year ended
December 31, 2020 for a summary of ICTS’s significant accounting policies.
Going Concern Assessment
Accounting Standard Update 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires a Company’s management to assess an entity’s ability to continue as
a going concern, which were provided in Note 1 to our consolidated financial statements included in this report.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment
date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.
Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon
examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income
tax positions taken are not offset or aggregated with other positions. Income tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of
being realized if challenged by the applicable taxing authority. The portion of the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
Discussion and Analysis of the Results of Operations
The following table summarizes our results of operations for the years ended
December 31, 2020,
2019 and
2018, however our discussion of the results of operations excludes the
comparison of the results for the years ended
December 31, 2019 and
2018. Refer to item 5, Operating and Financial Review and Prospects-Results of Operations in our Annual Report on Form 20-F for the year ended
December 31, 2019 which was filed
with the SEC on
June 15, 2020.
| |
|
U.S. dollars in Thousands
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
248,419
|
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
|
Cost of revenue
|
|
|
196,569
|
|
|
|
290,461
|
|
|
|
311,994
|
|
|
Gross profit
|
|
|
51,850
|
|
|
|
42,846
|
|
|
|
33,227
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
6,541
|
|
|
|
5,060
|
|
|
|
3,657
|
|
|
Goodwill impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
1,563
|
|
|
Selling, general and administrative
|
|
|
37,239
|
|
|
|
33,063
|
|
|
|
34,924
|
|
|
Total operating expenses
|
|
|
43,780
|
|
|
|
38,123
|
|
|
|
40,144
|
|
|
OPERATING INCOME (LOSS)
|
|
|
8,070
|
|
|
|
4,723
|
|
|
|
(6,917
|
)
|
|
Equity income (loss) from investment in affiliate
|
|
|
(790
|
)
|
|
|
91
|
|
|
|
124
|
|
|
Other expenses, net
|
|
|
(1,288
|
)
|
|
|
(10,518
|
)
|
|
|
(3,586
|
)
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
5,992
|
|
|
|
(5,704
|
)
|
|
|
(10,379
|
)
|
|
Income tax expenses
|
|
|
590
|
|
|
|
1,549
|
|
|
|
685
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
5,402
|
|
|
|
(7,253
|
)
|
|
|
(11,064
|
)
|
|
Loss from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
(289
|
)
|
|
NET INCOME (LOSS)
|
|
|
5,402
|
|
|
|
(7,253
|
)
|
|
|
(11,353
|
)
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
999
|
|
|
|
789
|
|
|
|
(123
|
)
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
$
|
4,403
|
|
|
$
|
(8,042
|
)
|
|
$
|
(11,230
|
)
|
The following table sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years ended
December 31, 2020,
2019 and
2018:
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
|
Revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
Cost of revenue
|
|
|
79.2
|
%
|
|
|
87.1
|
%
|
|
|
90.4
|
%
|
|
Gross profit
|
|
|
20.8
|
%
|
|
|
12.9
|
%
|
|
|
9.6
|
%
|
|
Research and development
|
|
|
2.6
|
%
|
|
|
1.5
|
%
|
|
|
1.1
|
%
|
|
Goodwill impairment
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
0.4
|
%
|
|
Selling, general and administrative
|
|
|
15.0
|
%
|
|
|
9.9
|
%
|
|
|
10.1
|
%
|
|
Total operating expenses
|
|
|
17.6
|
%
|
|
|
11.4
|
%
|
|
|
11.6
|
%
|
|
OPERATING INCOME (LOSS)
|
|
|
3.2
|
%
|
|
|
1.5
|
%
|
|
|
(2.0
|
)%
|
|
Equity loss from investment in affiliate
|
|
|
0.3 |
%
|
|
|
-
|
%
|
|
|
-
|
%
|
|
Other expenses, net
|
|
|
0.5
|
%
|
|
|
3.2
|
%
|
|
|
1.0
|
%
|
|
INCOME (LOSS) BEFORE INCOME TAX EXPENSES
|
|
|
2.4
|
%
|
|
|
(1.7
|
)%
|
|
|
(3.0
|
)%
|
|
Income tax expenses
|
|
|
0.2
|
%
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
2.2
|
%
|
|
|
(2.2
|
)%
|
|
|
(3.2
|
)%
|
|
Loss from discontinued operations
|
|
|
-
|
%
|
|
|
-
|
%
|
|
|
(0.1
|
)%
|
|
NET INCOME (LOSS)
|
|
|
2.2
|
%
|
|
|
(2.2
|
)%
|
|
|
(3.3
|
)%
|
|
Less: Net income (loss) attributable to non-controlling interests
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
-
|
%
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO ICTS INTERNATIONAL N.V.
|
|
|
1.8
|
%
|
|
|
(2.4
|
)%
|
|
|
(3.3
|
)%
|
The following table sets forth, for the annual periods indicated,
the Company’s revenues generated from customers by geographical area based on the geographical location of the customers invoicing
address:
| |
|
(U.S. dollars in Thousands)
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
|
Germany
|
|
$
|
119,500
|
|
|
$
|
137,207
|
|
|
$
|
134,646
|
|
|
Netherlands
|
|
|
58,446
|
|
|
|
97,700
|
|
|
|
121,465
|
|
|
United States of America
|
|
|
45,305
|
|
|
|
73,719
|
|
|
|
69,548
|
|
|
Other
|
|
|
25,168
|
|
|
|
24,681
|
|
|
|
19,562
|
|
|
Total Revenue
|
|
$
|
248,419
|
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
The COVID-19 outbreak has developed rapidly in 2020, with a significant number of infections.
The Company is dependent mostly in Europe and the United States of America for its
business on the airline industry. In addition, the decisions taken by various governments have affected economic activity and
the Company’s business as following:
|
• |
Decrease of travel by flights, reducing the demand for services the Company provide as part of its airport security and other aviation services. As a result, our cumulative revenues of the airport security and other aviation services in
the twelve months ended December 31, 2020 were $86.9 million lower than our revenues for the twelve months ended December 31, 2019. Many of the Company’s employees were laid off and / or ordered to stay home. |
|
• |
Governments in some of the countries in which we operate have announced the implementation of government assistance measures, which mitigated the impact of the COVID-19 outbreak on our results and liquidity. During 2020, in the United
States of America, the government has approved a payroll support of $13.7 million to the American subsidiary of the Company, all of which has been received as of December 31, 2020. Out of this amount the American subsidiary recognized an
amount of $12.7 million as reduction of labor expenses for the year ended December 31, 2020. Additional assistance up to $15.9 million was granted during 2021. In the Netherlands, the government has approved a support of €17.6 million
($21.6 million as of December 31, 2020) for the year ended December 31, 2020. The Dutch government extended the support program until June 30, 2021 and might extend it beyond. For the months January through March 2021, the Company was
granted additional assistance up to €4.6 million. In Germany, the employees are eligible for payroll support up to 60% of the employee’s payroll (on individual basis) in case the employees meet the support plan requirements. |
|
• |
Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the Company might experience further negative results and liquidity restrains. The exact impact on our activities in the remainder of
2021 and thereafter cannot be predicted. |
Revenue
Total revenue decreased from $333.3 million in 2019 to $248.4 million in 2020.
Revenue generated in Germany was $119.5 million in 2020 compared to $137.2 million in 2019. The decrease in revenue generated in Germany was mostly a result of less services
provided to our local customers (Frankfurt, Hamburg and Hannover Airports) because of the COVID-19 crisis. In addition, the Hannover Airport
contract ended in August 2020.
The Company’s revenue from this location was $9.2 million and $17.6 million
for the years ended
December 31, 2020 and
2019, respectively. Revenue was affected also by exchange rates as revenue is being translated from Euro to USD. Revenue of 2019 according to the 2020 exchange rate would have been $139.6 million,
representing an increase of 1.7% in exchange rate.
Revenue generated in the Netherlands was $58.4 million in 2020 compared to $97.7 million in 2019. The decrease in revenue generated in the Netherlands was a result of less
services provided to our main customer in the Netherlands (Schiphol Airport) because of the COVID-19 crisis. Revenue was affected also by exchange rates as revenue is being translated from Euro to USD. Revenue of 2019 according to the 2020 exchange
rate would have been $99.4 million, representing an increase of 1.7% in exchange rate.
Revenue generated in the United States of America was $45.3 million in 2020, compared to $73.7 million in 2019. The decrease in revenue generated in the United States of America
was mostly a result of less services provided to our aviation related services customers because of the COVID-19 crisis.
Revenue outside Germany, the Netherlands and the United States of America totaled $25.2 million in 2020 compared to $24.7 million in 2019. Increase in revenue was primarily a
result of increase of services provided our authentication technology to existing and new customers.
Cost of Revenue
Cost of revenue was $196.6 million or 79.2% of revenue in 2020, compared to $290.5 million or 87.1% of revenue in 2019. The majority of cost of revenue relates to payroll and
related costs. Following the COVID-19 crisis,
the Company’s revenue decreased which led to a decrease in the cost of sales and the relevant payroll expenses. Some countries provided financial assistance to
the Company and its
subsidiaries at the
airport security and other aviation services segment, the major ones were: (a) the Netherlands provided financial and payroll support to the Dutch companies in the group of €17.6 million ($21.6 million as of
December 31, 2020) reducing the
Company’s labor costs in the Netherlands and; (b) the United States of America which was provided in 2020 to
the Company payroll support of $13.7 million of which $12.7 million were used and recognized in 2020, reducing
the Company’s labor costs in
the United States of America. Those amounts were recorded in
the Company’s books as reduction of payroll expenses, which decreased the cost of revenue materially. In addition, as the revenue of
the Company decreased materially, the Copmpany has
been reducing other costs in order to adjust its cost of revenue to the current situation.
Research and Development Expenses (“R&D”)
Research and development costs were $6.5 million or 2.6% of revenue, compared to $5.1 million or 1.5% in 2019. As the authentication technology segment continues to increase its
sales, developments and activities,
the Company increased the number of employees in its Research and Development department, resulting mostly in increase of the R&D payroll costs. The sharp increase in the percentage of the R&D is because
the percentage is being affected by the decrease of
the Company’s revenues.
Selling, General and Administrative Expenses (“SG&A”)
SG&A expenses were $37.2 million or 15.0% of revenue in 2020, compared to $33.1 million or 9.9% of revenue in 2019. The authentication technology segment, increased its
SG&A costs by $2.0 million in 2020, primarily payroll, related expenses and marketing expenses, as part of its expansion and increase of sales. Additionally
the Company’s legal expenses increased by $2.0 million, partly costs that relate to new
bids in 2020, legal costs in regards to decrease of employees, costs incurred as due diligence costs and legal costs regarding the termination of Procheck’s
contract litigation.
Equity Income (Loss) from Investment in Affiliate
In April 2018,
the Company signed a Joint Venture Agreement with a South Korean Company, in order to provide aviation security and non-security services in South Korea. The
equity income (loss) from this investment was $0.0 million, $0.1 million and $0.1 million, for the years 2020, 2019 and 2018, respectively.
In December 2019,
the Company purchased 23.3% of Arrow Ecology & Engineering Overseas (1999).
The Company recognized its estimated share in Arrow loss in the amount of $0.8
million and $0.0 million, respectively, from this investment for the years 2020 and 2019.
Other Expenses, net
Other expenses, net, were $1.3 million or 0.5% of revenues in 2020, compared to $10.5 million or 3.2% of revenues in 2019. During 2019,
the Company paid a one-time compensation
for exchange rate and related losses in the amount of $8.1 million to the entity related to the main shareholder who provided
the Company loans as convertible notes. Additionally,
the Company repaid $30 million of the convertible notes on July
2019, which reduced the interest expense for the full year 2020 and for the second half of the year of 2019. Interest expense to related parties totaled $0.2 million in 2020 compared to $1.2 million in 2019. Total foreign currency loss in 2020 was
$0.3 million compared to loss of $0.1 million in 2019.
Other interest expenses and other bank charges were $0.9 million in 2020 compared to $1.5 million in 2019. Decrease relates to the decrease of usage of the line of credits in
Europe and the United States of America, following the receipt the funds of the governmental supports and the fact that many payments to the authorties were postponed as part of support programs.
Income Tax Expenses
Income tax expenses were $0.6 million or 0.2% of revenue in 2020 compared to $1.5 million or 0.5% of revenue in 2019. Income tax expenses relating to the authentication
technology segment were $0.7 million in 2020 compared to $1.3 million in 2019, as result of the decrease in the authentication technology segment profitability. Income tax expenses (benefit) relating to the airport security and other aviation
services were $(0.1) million in 2020 compared to $0.2 million in 2019. In 2020, although some of the
subsidiaries of
the Company were profitable, previous net operating losses were utilized to reduce the current year income taxes.
Reportable Segment
The following table sets forth, for the annual periods indicated, certain financial data related to
the Company’s reportable segments, however our discussion of the reportable
segments excludes the comparison for the year ended
December 31, 2018. Refer to item 5, Operating and Financial Review and Prospects – Results of Operations in our Annual Report on Form 20-F for the year ended
December 31, 2019, which was filed
with the SEC on
June 15, 2020.
| |
|
U.S. Dollars in thousands
|
|
| |
|
|
|
|
Airport
|
|
|
|
|
|
|
|
| |
|
|
|
|
Security
|
|
|
|
|
|
|
|
| |
|
|
|
|
and Other
|
|
|
|
|
|
|
|
| |
|
|
|
|
Aviation
|
|
|
Authentication
|
|
|
|
|
| |
|
Corporate
|
|
|
Services
|
|
|
Technology
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
222,654
|
|
|
$
|
25,765
|
|
|
$
|
248,419
|
|
|
Depreciation and amortization
|
|
|
72
|
|
|
|
1,302
|
|
|
|
716
|
|
|
|
2,090
|
|
|
Income (loss) from continuing operations
|
|
|
(3,853
|
)
|
|
|
6,056
|
|
|
|
3,199
|
|
|
|
5,402
|
|
|
Goodwill
|
|
|
-
|
|
|
|
746
|
|
|
|
-
|
|
|
|
746
|
|
|
Total assets from continuing operations
|
|
|
12,448
|
|
|
|
86,550
|
|
|
|
41,350
|
|
|
|
140,388
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
309,548
|
|
|
$
|
23,759
|
|
|
$
|
333,307
|
|
|
Depreciation and amortization
|
|
|
46
|
|
|
|
1,328
|
|
|
|
314
|
|
|
|
1,688
|
|
|
Income (loss) from continuing operations
|
|
|
(11,740
|
)
|
|
|
(2,406
|
)
|
|
|
6,893
|
|
|
|
(7,253
|
)
|
|
Goodwill
|
|
|
-
|
|
|
|
681
|
|
|
|
-
|
|
|
|
681
|
|
|
Total assets from continuing operations
|
|
|
23,381
|
|
|
|
64,647
|
|
|
|
35,419
|
|
|
|
123,447
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
329,150
|
|
|
$
|
16,071
|
|
|
$
|
345,221
|
|
|
Depreciation and amortization
|
|
|
45
|
|
|
|
1,756
|
|
|
|
96
|
|
|
|
1,897
|
|
|
Income (loss) from continuing operations
|
|
|
(6,205
|
)
|
|
|
(9,163
|
)
|
|
|
4,304
|
|
|
|
(11,064
|
)
|
|
Goodwill
|
|
|
|
|
|
|
695
|
|
|
|
|
|
|
|
695
|
|
|
Total assets from continuing operations
|
|
|
329
|
|
|
|
66,373
|
|
|
|
8,385
|
|
|
|
75,087
|
|
Corporate Segment
The Company’s loss from continuing operations in the corporate segment decreased from $11.7 million in 2019 to $3.9 million in 2020. In 2019,
the Company had the one-time expense
compensation of $8.1 million for exchange rate and related losses as noted above. In addition, interest expenses to related party decreased after the major amount of the loan was repaid in July 2019 from $1.2 million in 2019 to $0.2 million in
2020. In addition,
the Company incurred expenses of $0.5 milion in 2020 regarding examination of potential deals which did not mature into deals.
Airport Security and Other Aviation Services Segment
Decrease in revenue from airport security and other aviation services from $309.5 million in 2019 to $222.7 million in 2020 relates primarily to the COVID-19 crisis, which
materially affected the aviation industry due to flight restrictions, cancelled flights and quarantine requirements.
The Company’s income from continuing operations related to airport security and other aviation services was $6.1 million in 2020 compared to loss of $2.4 million in 2019. The
main reasons for the difference between 2020 and 2019 are: (a) in 2020 the segment received financial and payroll support from the Dutch government of €17.6 million ($21.6 million as of
December 31, 2020), which was recorded as reduction of
expenses (b) in 2020 the segment received payroll support from the United States of America government of $12.7 million, which was recorded as reduction of expenses and (d) during the year 2019, the segment’s operational costs as training, sick pay
and overtime payments to employees increased which reduced the profitability of the segment.
Authentication Technology Segment
Revenue in 2020 from the authentication technology segment was $25.8 million compared to $23.8 million in 2019. The segment continued to increase its revenue from existing
customers in addition to new ones. During 2020, revenue from some customers was reduced following the COVID-19 crisis, however, the revenue of the segment still increased compared to last year. The profit from continuing operations in this segment
amounted to $3.2 million in 2020 compared to $6.9 million in 2019. Decrease of profitability in 2020 relates to increase in R&D expenses which grew in 2020 to $6.5 million compared to $5.1 million in 2019 and increase of approximately $2.0
million in SG&A expenses, as
the Company is looking to increase its sales and penetrate into new markets.
Liquidity and Capital Resources
The Company’s most significant expenditures consist of payroll, related costs, professional fees and interest.
The Company has historically financed such expenditures through
cash flows from operations, funding received from lines of credit, loans with lenders in Europe, the United States of America and borrowings from a convertible note arrangement with a related party.
As of
December 31, 2020 and
2019,
the Company had cash, cash equivalents and restricted cash of $61.1 million and $54.8 million, respectively. As of
December 31, 2020 and
2019,
restricted cash were $9.5 million and $2.5 million which consist of collateral for our letters of credit and restricted bank accounts in the Netherlands, which are restricted for payments to local tax authorities.
As of
December 31, 2020 and
2019,
the Company had a working capital of $57.2 million and $27.6 million, respectively and shareholders’ deficit of $30.5 million and $35.7 million,
respectively. During the years ended
December 31, 2020,
2019 and
2018,
the Company incurred net income (loss) from continuing operations of $5.4 million, $(7.3) million and $(11.1) million, respectively, and cash flows provided by (used in)
operating activities of $24.2 million, $(9.1) million and $7.4 million, respectively.
As of
December 31, 2020,
the Company had a line of credit in the Netherlands up to €12 million ($14.7 million as of
December 31, 2020), which expired in
March 2021, although it continued until May 2021 (except the line of credit for guarantees of €2.5 million which is still in place) and additional line of credit in the United States of America up to $10 million, which will expire in October
2021. As of
April 30, 2021,
the Company is not using its line of credit in the United States of America and is not expecting to use it in the forseeble period.
In October 2020,
the Company extended the agreement with the entity related to the main shareholder to extend the period of the notes until January 2022. The maximum amount of
the notes will be $3.0 million, excluding interest, out of this amount $1.2 million are convertible into
the Company’s shares at a price of $0.4 per share.
The Company’s business plan, project profit from operations in 2021, including the expected governmental asistances. The COVID-19 outbreak developed rapidly in 2020, with a
significant number of infections.
The Company is dependent mostly in Europe and the United States of America for its business on the airline industry. In addition, ICTS is an employee intensive company.
The Company’s business plan depends on the
COVID-19 developments in the foreseen future and the recovery of the airline industry.
The decisions taken by various governments have affected economic activity and
the Company’s business as following:
|
• |
Decrease of travel by flights, reducing the demand for services the Company provide as part of its airport security and other aviation services. As a result, our revenues in 2020 were $248.4 million compared to $333.3 million in 2019. |
|
• |
Governments in some of the countries in which we operate have announced the implementation of government assistance measures, which mitigated the negative impact of the COVID-19 outbreak on our results and liquidity. In the United States
of America, the government has approved in 2020 a payroll support of $13.7 million to the American subsidiary of the Company and additional $15.9 million in 2021. In the Netherlands, the government has approved a support of €17.6 million
($21.6 million as of December 31, 2020) for the period April 1, 2020 until December 31, 2020 and additional assistance up to €4.6 million for the period January through March 2021. The Company is entitled to request additional support for
the period April 1, 2021 until June 30, 2021. In Germany, the Company’s employees are eligible for payroll support up to 60% of the employee’s payroll (on individual basis) in case the employees meet the support plan requirements. The
Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. The Company has already applied for this support starting April 2020. These available
governmental support plans might be extended and/or changed according to the future COVID-19 developments. |
|
• |
Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the Company might experince negative results and liquidity restrains. The exact impact on our activities in the remainder of 2021 and
thereafter cannot be predicted. |
Alternate Sources of Liquidity
The Company’s business plan for twelve months from the issuance of this report projects income from operations, positive cash flows and includes the receipt of governmental
funding from the United States of America and the Netherlands as discussed above. If the impact of COVID-19 negatively impacts the global economy beyond its current forecast,
the Company expects that the governmental support programs could be
extended and
the Company might receive additional funding in the Netherlands under the NOW and from the United States of America under the Payroll Support Program. Furthermore,
the Company has alternate sources of liquidity that it could access to
ensure its ability to continue as a going concern. There can be no assurance that management will be successful in achieving its business plan.
The below analysis of cash flows excludes discussions related to year ended
December 31, 2018. Refer to items 5, operating and Financial review and Prospects-Liquidity and
Capital Resources in our Annual Report on Form 20-F for the year ended
December 31, 2019, which was filed with the SEC on
June 15, 2020.
Cash Flows from Operating Activities
Our cash flows from operating activities vary significantly from year to year, depending on our operating results, timing of cash receipts and disbursements on accounts
receivable, accounts payable, accrued expenses and other current liabilities.
Net cash provided by operating activities for the year ended
December 31, 2020 was $24.2 million. This provided cash resulted primarily from increase in other liabilities of
$23.8 million which relate mostly to the postponement of wage tax and other payments to the Dutch government as part of the governmental assistance in the Netherlands. The VAT payable increased by $4.0 mainly attributable to the German government
allowed to postpone the VAT payment for the period from April through June 2020 to the end of 2021. In addition,
the Company had a net income from continuing operations of $5.4 million and a non-cash charge of $2.1 million for depreciation and
amortization was recognized in 2020. This was offset mainly by $13.6 million increase of prepaid expenses and other current assets which relates mostly to receivable from the Dutch tax authorities of $12.3 million, a decrease of $5.1 million of
accrued expenses and other current liabilities and decrease of $2.5 million of accounts payable.
Net cash used in operating activities for the year ended
December 31, 2019 was $9.1 million. This cash used in, resulted primarily from decrease in accrued expenses and other
current liabilities of $8.9 million relating to the payment of Procheck’s termination costs, decrease of income taxes payable of $1.8 million following the lower profitability in the European operations of the aviation security, decrease of VAT
payable of $4.7 million, mostly as a result of time difference between the actual dates of payment and the fact that the VAT as of
December 31, 2019, does not include VAT for the operations of Procheck, and net loss of $7.3 million. This was offset
mainly by one-time charge of $8.1 million revaluation and related costs reimbursed to a related party, decrease of income tax receivable of $1.3 million, decrease of accounts receivable, net, of $0.7 million and non-cash charge of $1.7 million for
depreciation and amortization.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended
December 31, 2020 was $3.1 million and consisted primarily of capital expenditures of $2.2 million and capitalization of
software costs of $0.6 million.
Net cash used in investing activities for the year ended
December 31, 2019 was $3.4 million and consisted primarily of capital expenditures of $1.9 million and investments in
Arrow Ecology & Engineering Overseas (1999) of $1.8 million.
Cash Flows from Financing Activities
Net cash used in financing activities for the year ended
December 31, 2020 was $16.5 million which consisted of primarily repayment of $13.1 million of the borrowings under the
lines of credit, repayment of $1.5 million loan payable to a related party and repayment of $1.1million loan payable.
Net cash provided by financing activities for the year ended
December 31, 2019, was $51.9 million which consisted primarily of $80.0 million proceeds from sale of AU10TIX’s
preferred shares and additional borrowings under lines of credit, net, of $8.1 million, increase following the severance payments done in 2019 to the Procheck employees following their employment termination totaling more than $7.7 million. This
was offset mostly by repayment of the convertible notes payable to a related party of $29.6 million, repayment of loan payable of $1.1 million, and payment of $6.1 million of transaction costs related to the sale of AU10TIX’s preferred shares.
Borrowings
United States of America
The Company’s U.S. subsidiary is a party to a credit facility with a commercial lender, which provides a maximum borrowing capacity up to $10.0 million, subject to a borrowing
base limitation. The borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 80% of eligible unbilled receivables, as defined, plus (iii) 95% of a $0.5 million standby letter of credit that was
provided to the lender by an entity related to the main Shareholder. Borrowings under the credit facility are secured by the U.S. subsidiary’s accounts receivable, unbilled receivables, equipment, cash and the $0.5 million letter of credit that was
provided to the lender by
the Company.
As of
December 31, 2020, and
2019,
the Company had approximately $0.0 million and $6.5 million, respectively, outstanding under the line of credit arrangement. As of
December 31,
2020 and
2019,
the Company had $4.1 million and $3.5 million, respectively, in unused borrowing capacity under the line of credit facility.
Borrowings made under the credit facility bear interest, which is payable monthly, at LIBOR plus 3% per annum (3.14% as of
December 31, 2020).
The Company’s weighted average interest rate in the United States of America during the years ended
December 31, 2020,
2019 and
2018 is 4.42%, 5.44% and 6.0% respectively. The
Company is required to maintain a minimum fixed charge coverage ratio. The credit facility expires in October 2021.
Europe
The Company has a credit arrangement with a commercial bank, to provide it with up to €12.0 million ($14.7 million as of
December 31, 2020) in borrowings which was renewed in May
2020 through March 2021. Borrowings under the line of credit bear interest at one-month EURIBOR plus 4.8% with a minimum of 4.8% per annum.
The Company is also subject to unused line fee of 0.75% per annum, which is payable quarterly. The line of
credit is secured by accounts receivable of ten of
the Company’s European
subsidiaries, tangible fixed assets and a bank guarantee of €2.0 million ($2.5 million as of
December 31, 2020) provided by the parent company, ICTS International N.V. The
line of credit cannot exceed 70% of the borrowing base. The line of credit includes certain financial covenants.
In addition to the line of credit arrangement, a guarantee facility of €2.5 million ($3.1 million as of
December 31, 2020) is provided to
the Company by the same commercial bank,
which was also renewed until March 2021, with an interest of 2.5% per annum and an unused line fee of 0.75% per annum which is payable quarterly. As of
December 31, 2020 and
2019,
the Company had €1.0 million and €2.3 million ($1.2 million and $2.6
million as of
December 31, 2020 and
2019), respectively, of outstanding guarantees under the guarantee facility, which related to leases and performance guarantees for
contracts.
The line of credit was not renewed and management expects to renew the guarantee facility which will be extended for one year under the same conditions. The guarantee facility is
secured by the accounts receivables of ten of
the Company’s European
subsidiaries.
The Company has an additional credit arrangement in Sweden to provide it with up to 4.0 million SEK ($0.5 million as of
December 31, 2020) in borrowings. Borrowings under the
line of credit bear annual interest of 2.8% and subject to annual extension by the financial institution. The line of credit is secured by accounts receivable of the Swedish subsidiary. As of
December 31, 2020 and
2019,
the Company had 1.6 million
SEK and 1.1 million SEK ($0.2 million and $0.1 million as of
December 31, 2020 and
2019) respectively in outstanding borrowings under the line of credit facility.
Related Parties Financing
Convertible Notes Payable to a Related Party
The Company has an agreement with an entity related to its main shareholder, to provide it with up to $37.0 million in revolving loans through
June 30, 2020. The term of the
arrangement can be automatically extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate of
LIBOR plus 7% for U.S. dollar-denominated loans and
the Company’s European commercial bank interest base rate plus 3% for Euro-denominated loans. The arrangement is secured by a 26% interest in one of
the Company's European
subsidiaries. In
connection with the arrangement, the holder was granted an option to convert the outstanding principal notes payable under the arrangement into
the Company's common stock at a price of $1.50 per share and the unpaid accrued interest at a price of
$0.75 per share.
In January 2019, the entity related to the main shareholder converted $2.9 million accrued interest into 3,852,364 shares at a price of $0.75 per share.
In May 2019,
the Company granted this entity, the option to convert up to $2.0 million of the loan into
the Company’s shares at a price of $0.40 per share, and all other
conversion rights for the balance of the debt except $2.6 million, which is convertible at a price of $0.75 per share, would eliminate. In December 2019, this entity converted the $2.6 million accrued interest into 3,480,968 shares at a price of
$0.75 per share. In October 2020, the entity converted $0.8 million into 2,000,000 shares.
In June 2019, the Board of Directors approved a one-time compensation of $8.1 million to this entity for exchange rate and related losses suffered in connection with its
convertible notes to
the Company during the years. Compensation was approved subject to closing of investment transaction in
the Company’s subsidiary, AU10TIX Technologies B.V. (
“AU10TIX”, formerly ABC Technologies B.V.), which happened in July
2019. As a result,
the Company recorded $8.1 million in connection with this payment which is included in other expenses in the consolidated statement of operation and comprehensive income (loss).
In July 2019,
the Company repaid $30.0 million of the convertible notes.
In October 2020, the loan was extended until January 2022, the loan amount was reduced to $3.0 million and the pledge of 26% interest in one of
the Company's European
subsidiaries was terminated.
As of
December 31, 2020 and
2019, convertible notes payable to this related party consist of $1.2 million and $2.0 million, respectively.
Note Payable to Related Party
As of
December 31, 2020 and
2019, notes payable to this related party consist of $0 and $1.5 million, respectively.
Total interest expense related to these notes is $0.2 million, $1.2 million and $2.7 million for the years ended
December 31, 2020,
2019 and
2018, respectively.
Sale of AU10TIX Technologies B.V. (Formerly ABC Technologies B.V.) Preferred Shares
On
July 3, 2019, AU10TIX, entered into a Series A Preferred Subscription Agreement (the
"Agreement") with TPG Lux 2018 SC I, S.a.r.l (
"TPG"), according to which AU10TIX issued
Series A Preferred Shares (
"Series A Shares") to TPG for a subscription price of US$60.0 million in cash representing approximately 24% of the outstanding share capital of AU10TIX and 23.077% of the fully-diluted share capital of AU10TIX.
Transaction costs totaled $4.5 million and were deducted from the redeemable non-controlling interests balance.
On
November 7, 2019, AU10TIX entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. (
"Oak"), according to which AU10TIX issued
1,000,000 Series A Preferred Shares and 23,622 Series A-1 Preferred Shares (
"Series A-1 Shares" and together with Series A Shares –
"the Preferred Shares") to Oak for a subscription price of US$20.0 million in cash representing approximately 7.4%
of the outstanding share capital of AU10TIX and 7.1% of the fully-diluted share capital of AU10TIX. For accounting purposes, the investment was allocated to the Series A and Series A-1 Preferred Shares on a relative fair value basis: $19.5 million
and $0.4 million, respectively. Transaction costs totaled $1.5 million and were deducted from the respective investment amounts.
Following the Oak investment, on
November 7, 2019, TPG subscribed for 307,087 Series A-1 Shares at nominal value (US$0.001 per share) (
“Bonus Issue Series A-1 Shares”) in order
to preserve its 23.077% ownership interest in the fully diluted share capital of AU10TIX.
The Preferred Shares Rights
Liquidation Preference: The holders of Series A Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a sale, initial public offering
(“IPO”), merger, consolidation, reorganization, winding-up, dissolution or liquidation of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the ordinary shares, to receive the greater
of: (a) an amount equal to the initial subscription price for the Series A Shares, plus all accrued but unpaid dividends in respect of the Series A Shares, less all dividends previously paid on the Series A Shares, and (b) the proceeds
distributable in respect of the Series A Shares had they been converted into ordinary shares. The initial subscription price for the Series A Shares (and calculations derived therefrom) are subject to customary adjustments as set forth in the
agreements executed in connection with the Sale.
Conversion Rights: The Series A Shares are subject to conversion into ordinary shares of AU10TIX: (a) on the written request by any Series A Shareholder; and (b) immediately
prior to a qualifying IPO of AU10TIX (being an IPO where the net aggregate gross proceeds to AU10TIX exceed US$75.0 million and where the subscription price per share paid by the public is not less than 150% of the initial subscription price paid
for the Series A Shares). Pursuant to these conversion arrangements, the Series A Shares will convert into ordinary shares on a 1:1 basis (subject to certain agreed upon adjustments).
Anti-Dilution Protection: The Shareholders Agreements contain customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by AU10TIX at
a price per new security that is less than the initial subscription price paid for the Series A Shares, then the Series A Holders shall be entitled to receive additional Series A Shares (at no further cost) on a weighted-average basis, reflecting
the value of equity in AU10TIX as determined based on the subscription price paid in the new issue of securities.
Pre-emption Rights: The Shareholders Agreements contain a restriction on issuing any securities ranking senior to or on party with the Series A Shares for as long as TPG and/or
any subsequent investor holds at least one third of the overall number of Series A Shares in issue as at the date of completion of the Sale. In addition, each shareholder holding in excess of 3% of the shares of AU10TIX has the right to participate
in any new issuance of securities by the AU10TIX, subject to customary exceptions.
Exit Rights
: At any time from and after the fifth (5th) anniversary of completion of the issuance, upon written request by TPG, AU10TIX is required to use reasonable
endeavours to facilitate the sale by TPG of the Preferred Shares (or, following conversion, ordinary shares) to a third party at a price in excess of 150% of the initial subscription price paid for the Series A Shares and subject to a right of
first refusal in favour of
the Company. In the event that, three (3) months thereafter, a sale of the Preferred Shares held by TPG has not been consummated, upon written request by TPG, AU10TIX is required to facilitate a sale of AU10TIX within six
(6) months after such written request, and thereafter, TPG has the right to require AU10TIX to facilitate a sale or IPO of AU10TIX. On the exercise of such rights, each other shareholder (including
the Company) is required to cooperate with TPG
regarding such sale or IPO and TPG has the right to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
The Exit Right is part of the issuance of the Series A Shares, and was not entered into separately from the transaction that created the non-controlling interests. The Exit Right
is not legally detachable from the non-controlling interests because it is non-transferrable (i.e., the instrument cannot be transferred without the underlying preferred shares). Thus, the Exit Right would not be separately exercisable from the
non-controlling interests shares because the non-controlling interests shares will be settled when the Exit Right is exercised. As a result, the Exit Right would be considered embedded in the Series A Shares held by TPG.
Shares of redeemable convertible preferred stock are not mandatorily or currently redeemable. However, the Exit Right would constitute a contingent redemption event that is
outside of
the Company’s control. As such, Series A Shares have been presented outside of permanent equity as redeemable non-controlling interests.
The Company has adjusted the carrying value of the redeemable non-controlling interests to adjust
for the non-controlling interests share in AU10TIX's profits and Other Comprehensive Income (Loss).
The Company has not adjusted the carrying values of the redeemable non-controlling interests to the deemed liquidation values of such shares since a
liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a liquidation
event will occur.
The Series A-1 Preferred Shares do not entitle their holders to any liquidation or exit rights as the Series A Preferred Shares, and therefore are classified within permanent
equity, as non-controlling interests.
The anti-dilution provisions cited above have not been bifurcated from the host
contract since they are to be settled into AU10TIX's non-traded shares, thus the
"net settlement"
criteria is not met.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $6.5 million, $5.1 million and $3.7
million during the years ended
December 31, 2020,
2019 and
2018, respectively.
Trend Information
Labor market conditions may require
the Company to increase its prices when possible according to the
contracts with customers. Cost of labor is the main variable in determining
any cost increases.
The Company might be affected by a worldwide economic slowdown, which might affect the aviation industry. As
the Company is a service provider to this industry, such trends can
affect the results of
the Company. As of 2020
the company has been materially affected by the COVID-19 crisis as mentioned before.
Off-Balance Sheet Arrangements
The Company is a party to a consulting arrangement and agency agreements, in addition,
the Company has no unconsolidated special purpose entities.
Future Contractual Obligations
The following table summarizes our future contractual obligations as of
December 31, 2020:
|
Contractual Obligations
|
|
Payments due by Period (U.S. Dollars in Thousands)
|
|
| |
|
Total
|
|
|
Less than 1 Year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
more than 5 years
|
|
|
Lines of credit in Europe
|
|
$
|
13,814
|
|
|
$
|
13,814
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Consulting agreements
|
|
|
1,104
|
|
|
|
184
|
|
|
|
552
|
|
|
|
368
|
|
|
|
-
|
|
|
Convertible notes payable - related party
|
|
|
1,200
|
|
|
|
-
|
|
|
|
1,200
|
|
|
|
-
|
|
|
|
-
|
|
|
Operating lease obligations
|
|
|
14,418
|
|
|
|
4,048
|
|
|
|
8,063
|
|
|
|
1,465
|
|
|
|
842
|
|
|
Governmental payments in the Netherlands (VAT, social security and wage tax)
|
|
|
25,548
|
|
|
|
2,115
|
|
|
|
23,433
|
|
|
|
|
|
|
|
-
|
|
| |
|
$
|
56,084
|
|
|
$
|
20,161
|
|
|
$
|
33,248
|
|
|
$
|
1,833
|
|
|
$
|
842
|
|
|
Contractual Obligations
|
|
Payments due by Period (U.S. Dollars in Thousands)
|
|
| |
|
Total
|
|
|
Less than 1 Year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
more than 5 years
|
|
|
Guarantees
|
|
$
|
1,195
|
|
|
$
|
-
|
|
|
$
|
1,195
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Letters of credit
|
|
|
3,991
|
|
|
|
775
|
|
|
|
3,216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
5,186
|
|
|
$
|
775
|
|
|
$
|
4,411
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
| |
|
Age
|
|
Position
|
|
Menachem Atzmon
|
|
76
|
|
Chairman of the Supervisory Board
|
|
Ron Atzmon
|
|
47
|
|
Member of the Supervisory Board and Managing Director of AU10TIX
|
|
Gil Atzmon
|
|
45
|
|
Member of the Supervisory Board
|
|
Philip M. Getter
|
|
84
|
|
Member of the Supervisory Board, Chairman of the Audit Committee
|
|
David W. Sass
|
|
85
|
|
Member of the Supervisory Board
|
|
Gail F. Lieberman
|
|
77
|
|
Member of the Supervisory Board, Member of the Audit
Committee and Chairman of the Compensation Committee
|
|
Gordon Hausmann
|
|
75
|
|
Member of the Supervisory Board, Member of the Audit Committee and member of the Compensation Committee
Committee and Member of the Audit Committee
|
|
|
|
45
|
|
Joint Managing Director and Chief Financial Officer
|
|
|
|
38
|
|
Joint Managing Director
|
Menachem J. Atzmon is a CPA (Isr). Since 1976 Mr. Atzmon serves as director and chairman of Spencer Corporation. From 1996 until 2012 Mr. Atzmon has been the managing director of
Albermale Investment Ltd., an investment company. Since 1998 until 2012 he has served as the Chairman of the Management Board of Seehafen Rostock, Umschlagsgesellschaft GmbH and its Holding Company. Mr. Atzmon has been a member of the Supervisory
Board of ICTS since 1999 and acts as the Chairman of the Supervisory Board since 2004. Since 2010 he serves as the Chairman of Arrow Ecology & Engineering Overseas (1999) Ltd, an advance recycling company. During 2014 Mr. Atzmon was appointed
in addition to his role of Chairman of the Supervisory Board to CEO of the Arrow Ecology & Engineering Overseas Ltd.
Ron Atzmon is the Managing Director of the AU10TIX Group since September 2008. Mr. Atzmon was the CEO and founder of 1ST2C.com between April 2005 until January 2009. Mr. Atzmon
holds an MA in Business Administration from the College of Management Academic, Israel and an MBA from the Imperial College London, UK.
Gil Atzmon is the CEO of Arrow Ecology since February 2017. Mr. Atzmon was a Director of Sales at S. Juwal & Co from 2002 to 2017. Mr. Atzmon holds a BA in Business
Administration and Management from IDC Herzliya, Israel and an MBA from the London Metropolitan University, UK.
Philip M. Getter has been managing member of GEMPH Development LLC since 1985. Mr. Getter has more than 30 years of corporate finance experience. From 2000 to 2005 he was
president of DAMG Capital, LLC Investment Bankers. Prior thereto he was head of Investment Banking and a member of the board of directors of Prime Charter, Ltd. After graduation from Cornell University he served as Administrative Assistant to the
Director of United States Atomic Energy Commission. From 1960 to 1969 he was a partner with Shearson, Hammill and from 1969 to 1975 Senior Partner of Devon Securities, an international investment-banking boutique. From 1975 to 1984 he was
Chairman/CEO of Generics Corporation of America, then one of the largest generic drug companies in the United States of America. As President and CEO of Wolins Pharmacal (1977 to 1984) he led the reorganization and restructuring of this distributor
of medical supplies. Mr. Getter was Chairman of Inksure Technologies, Inc.a manufacturer of RFID and security inks. He was a founder of KIDSRx an all-natural pharmaceutical company and chairman of TCI College of Technology. Mr. Getter has been a
member of The Broadway League [League of American Theatres and Producers] Senior Executive Vice Chairman of The Kurt Weill Foundation for Music, and Trustee of the American Theatre Wing [TONY and OBIE Awards]. He has been involved in most aspects
of the entertainment industry and has produced for Broadway, television and film. His productions have earned Pulitzer Prize, Tony and Grammy Awards including winner of the 2019 Tony Award for Hedestown as best musical.
David W. Sass for the past 61 years has been a practicing attorney in New York City and is currently a Special Council in the law firm of McLaughlin & Stern, LLP. Mr. Sass is
also licensed in the State of Texas. Mr. Sass has been a director of ICTS since 2002 and is also a director of several privately held corporations. Mr. Sass is an Honorary Trustee of Ithaca College.
Gail F. Lieberman is the founder and Managing Partner of Rudder Capital, LLC, which provides financial and strategic advisory services for middle-market companies in the services
& technology sectors. Previously, she was the Chief Financial Officer for Thomson Corporation’s Financial & Professional Publishing division, Moody’s Investor Service, Inc. and Scali, McCabe, Sloves, Inc. (Ogilvy Group). Ms. Lieberman is a
director of Thesys Group, a private financial technology company and a board member and Chairman of the Audit & Finance Committee of WL Gore & associates. Mrs. Lieberman is a board member of Equilend, a financial technology company.
Formerly Mrs. Lieberman served as board member for the South-Central Connecticut Regional Water Authority, board member, Compensation Committee Chair and Audit Committee Member for Dara Biosciences (NASDAQ: DARA), board member and Audit Committee
Chair for I-Trax Inc. (Amex: DMX), board member and Audit and Governance Committee Member for TriPath Imaging Inc. (NASDAQ: TPTH) and board member and Audit Committee Chair for Breeze-Eastern Corporation (Amex: BZC). She also served on the board of
FTEN, a financial technology company. Ms. Lieberman holds a BA in Mathematics and Physics and an MBA in Finance from Temple University.
Gordon Hausmann is the senior partner of his own law firm, founded in London over 35 years ago. He specializes, amongst other things, in corporate and commercial law, including
business finance and banking law, litigation and representation of several substantial family offices. Mr. Hausmann holds office as a board member of numerous companies and institutions, including listed companies in the UK Israel and elsewhere.
These include an international airline, some Embassies, finance companies (including a company associated with a private Swiss banking group) and other well-known and governmental entities. Mr. Hausmann also holds office and advises a number of
charities, including Governor of the Hebrew University.
Alon Raich is a CPA (Isr). From 2001 to 2002, Mr. Raich worked in the accounting firm Kesselman & Kesselman, PriceWaterhouseCoopers (PWC). Mr. Raich joined ICTS in September
2005 as Financial Controller and became Chief Financial Officer (CFO) of ICTS in 2008. Since February 2020, Mr. Raich is a joint Managing Director of
the Company. Mr. Raich holds a BA degree in economics and accounting and a MA degree in law from
Bar Ilan University, Israel.
Rom Shaked is a CPA (Isr.) and an attorney at law (Isr.). Mr. Shaked joint ICTS in 2015 as an Internal Auditor. In April 2019 Mr. Shaked was nominated as Deputy CEO of I-SEC
International Security B.V. and is responsible for I-SEC’s Quality Assurance, Corporate HR, and is providing support in project management in different areas. As of February 2020, Mr. Shaked is a joint Managing Director of
the Company and for I-SEC
International. Before joining ICTS Mr. Shaked was working as a financial auditor and in the Israeli Securities Authority (ISA).
Summary Compensation Table
The following table sets forth compensation earned by
the Company’s Managing Directors and the highest paid executives during the years 2018 through 2020 (U.S. Dollars in thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
Number
|
|
|
Number
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
of
|
|
|
of
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
Plan
|
|
|
Compensation
|
|
|
Option
|
|
|
Stock
|
|
|
|
|
|
Position
|
|
Year
|
|
Salary
|
|
|
Bonus
|
|
|
Compensations
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Award
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
|
Managing
|
|
2020
|
|
|
342
|
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
352
|
|
|
Director (a)
|
|
2019
|
|
|
476
|
|
|
|
-
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
496
|
|
|
|
|
2018
|
|
|
481
|
|
|
|
295
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
797
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Non-equity
|
|
|
Nonqualified
|
|
|
Number
|
|
|
Number
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
Deferred
|
|
|
of
|
|
|
of
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Bonus /
|
|
|
All Other
|
|
|
Plan
|
|
|
Compensation
|
|
|
Option
|
|
|
Stock
|
|
|
|
|
|
Position
|
|
Year
|
|
Salary
|
|
|
Commission
|
|
|
Compensations
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Award
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
$
|
|
|
Managing
|
|
2020
|
|
|
192
|
|
|
|
459
|
|
|
|
90
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
741
|
|
|
Director of a subsidiary (b)
|
|
2019
|
|
|
185
|
|
|
|
529
|
|
|
|
87
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801
|
|
|
(b) |
Highest paid employee in 2020 and 2019
|
Each member of the Supervisory Board who is not an employee of
the Company receives an annual fee of $30 thousands and a fee for each Supervisory Board or committee meeting
attended of $2 thousands. The Chairman of the Audit Committee receives an additional $20 thousands per year. The Chairman of the Board receives an annual fee of $50 thousands. Managing Directors are being employed by
the Company and the total
expenses regarding the employment of the current Managing Directors for the year ended
December 31, 2020 was $0.5 million.
The following table sets forth information concerning the aggregate compensation paid or accrued on behalf of all of our directors and executive officers as a group for the year
ended
December 31, 2020:
| |
|
Salaries, fees,
|
|
|
Pension, retirement
|
|
| |
|
commissions
|
|
|
and other
|
|
| |
|
and bonuses
|
|
|
similar benefits
|
|
| |
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Supervisory Directors as a group (7 persons)
|
|
$
|
322
|
|
|
$
|
-
|
|
|
Officers as a group (6 persons)
|
|
$
|
1,324
|
|
|
$
|
163
|
|
Background and Compensation Philosophy
Our Compensation Committee consists of Gail Lieberman, Chairman and Gordon Hausmann, all independent directors. The Compensation Committee and, prior to its establishment our
Supervisory Board of Directors determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized
companies, and contributions made by the officers to our success. Each of the named officers will be measured by a series of performance criteria by the Supervisory Board of directors, or the compensation committee on a yearly basis. Such criteria
will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance.
Our Supervisory Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our
executive officers. The Compensation Committee makes an independent evaluation of appropriate compensation of key employees, with input from management. The Compensation Committee has oversight of executive compensation plans, policies and
programs.
Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. The base salary component of
our compensation program is a fixed amount and does not depend on performance. Our cash incentive program takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe it does not
incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are limited by the terms of our equity plans to a fixed maximum specified in the plan, and are subject to vesting to align the long-term interests of
our executive officers with those of our stockholders.
Elements of Compensation
We provide our executive officers with a base salary and certain bonuses and commissions as well as equity awards in some cases to compensate them for services rendered during
the year. The Compensation Committee determines the composition and amount of director and key employee compensation. When the annual award consists of equity purchases, it is only permitted at a price equal or above market.
Board Practices
We have a Supervisory Board and a Management Board. The Supervisory Board has the primary responsibility for supervising the policies of the Management Board and the general
course of corporate affairs and recommending the adoption of the annual financial statements of ICTS by its shareholders. The Management Board is responsible for the day-to-day operations of ICTS. Members of the Supervisory Board and the Management
Board are appointed by the shareholders for a term of one year. Non-executive officers are appointed by and serve at the satisfaction of the Management Board.
The members of the Supervisory Board as of
December 31, 2020 and the initial year they joined the Supervisory Board are as follows: Menachem Atzmon (1999), Ron Atzmon (2018), Gil
Atzmon (2018), David W. Sass (2002), Philip M. Getter (2003), Gordon Hausmann (2005) and Gail F. Lieberman (2010).
The Audit Committee consists of Philip M. Getter, Chairman, Gail F. Lieberman and Gordon Hausmann, all of whom are independent. Mr. Getter and Ms. Lieberman have financial
expertise. The audit committee evaluates ICTS's accounting policies and practices and financial reporting and internal control structures, selects independent auditors to audit
the Company’s financial statements and confers with the auditors and
the officers. The Audit Committee has an Operating Charter as well. We do not have a Nominating Committee. The members of the Audit Committee and Compensation Committee are all independent and were never officers or employees of
the Company.
The Supervisory Board of
the Company has adopted a Code of Ethics for principal Executive Officers, Directors and senior financial officers.
The
Articles of Association of ICTS require at least one member of both the Management Board and the Supervisory Board, but do not specify a maximum number of members for such
boards. The general meeting of shareholders determines the exact number of members of both the Management Board and the Supervisory Board. Under the laws of the Netherlands and the
Articles of Association, each member of the Supervisory Board and
Management Board holds office until such member's resignation, death or removal, with or without cause, by the shareholders.
Employees
As of
December 31, 2020,
the Company has 6,235 employees, of which 4,709 employees are located in Europe, Far East and Israel and 1,526 are located in the United States of
America.
Share Ownership
See tables under Item 7: "Major Shareholders" and "Related Party Transactions" below.
Options to Purchase Securities
In June 2016, one of
the Company’s
subsidiaries adopted a Stock Option Plan and reserved 500,000 shares of common stock for that subsidiary’s future issuance. As of
December 31,
2020, the subsidiary has 13,000,000 authorized shares of which 12,500,000 shares are issued and outstanding. Under the stock option plan, stock options may be granted to that subsidiary’s employees, officers, directors, consultants and service
providers of the subsidiary at an exercise price as determined by the subsidiary’s board of directors with expiration terms of not more than ten years after the date such option is granted. Options granted under the plan generally vest over a
period of four years.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table sets forth certain information regarding ownership of
the Company's Common Shares as of
December 31, 2020 with respect to:
Each person who is known by
the Company to own beneficially more than 5% of
the Company's outstanding Common Shares.
All directors and officers as a group.
| |
|
Percent of
|
|
|
|
|
| |
|
Amount Beneficially
|
|
|
Common shares
|
|
|
Name Shareholders Holding Five Percent or More
|
|
Owned (a)
|
|
|
Outstanding (a)
|
|
|
|
|
|
|
|
|
|
|
MacPherson Trust and its Ultimate Beneficial Owners (b)
|
|
|
62.6
|
%
|
|
|
23,418,861
|
|
|
Menachem J. Atzmon
|
|
|
13.0
|
%
|
|
|
4,850,000
|
|
|
Igal Tabori
|
|
|
5.1
|
%
|
|
|
1,902,483
|
|
|
All officers and directors as a group (9 persons), the MacPherson Trust and its Ultimate Beneficial Owners
|
|
|
84.6
|
%
|
|
|
31,680,721
|
|
|
(a) |
The amounts include common shares owned by each of the above, directly or indirectly.
|
(b) 1. The MacPherson Trust (“Trust”) was created for the benefit of the family of Mr. Menachem J. Atzmon. The Trust owns Spencer Corporation, Limited, which holds together with
the Trust and its Ultimate Beneficial Owners approximately 62.6% of the issued and outstanding Common Shares. Mr. Atzmon disclaims any beneficial interest in the MacPherson Trust. Spencer Corporation Limited and the MacPherson Trust and its
Ultimate Beneficial Owners together with Mr. Atzmon are able to appoint all the directors of ICTS and control the affairs of ICTS.
2. As of
December 31, 2020 the Company has convertible notes payable to a related party in the total amount of $1.2 million, convertible at a rate of $0.40 per share. The
calculation above does not take into consideration the conversion of convertible notes.
Related Party Transactions
An entity related to one of
the Company's Supervisory Board members provide legal services to
the Company. Legal expense related to these services is $46 thousands, $46 thousands
and $35 thousands for the years ended
December 31, 2020,
2019 and
2018, respectively.
The Company engages the services of a related party to provide certain selling and management services to the authentication technology segment.
The Company incurred expenses of
$0.7 million, $0.8 million and $0.7 million for such services for the years ended
December 31, 2020,
2019 and
2018, respectively. As of
December 31, 2020, and
2019 the outstanding balances due for these services were $0.1 million and $0.2 million,
respectively, included in accrued expenses and other current liabilities. In addition, since April 2018, the related party serves as a board member of
the Company and was paid an amount of $38 thousands, $28 thousands and $15 thousands as board
fees, for the years ended
December 31, 2020,
2019 and
2018, respectively.
An entity related to
the Company’s main shareholder provided a letter of credit of $0.5 million to a commercial bank to guarantee a borrowing arrangement on behalf of one of the
Company’s
subsidiaries. In December 2019,
the Company replaced the letter of credit by its own letter of credit.
The Company engages the services of a related party to provide certain selling services to its authentication technology segment.
The Company incurred expenses of $0.1 million
for such services for each of the years ended
December 31, 2020,
2019 and
2018, respectively.
The Company engages the services of a related party to provide internal audit services. As of February 2020, the related party acts as a Managing Director of
the Company. The
Company incurred expenses of $0.2 million for such services for each of the years ended
December 31, 2020,
2019 and
2018.
The chairman of the board, a related party, receives annual compensation of $0.1 million for his services as chairman. In addition, in 2020,
the Company incurred expenses of $0.1
million for the services he provides to AU10TIX.
In August 2017,
the Company engaged the services of a related party to provide certain selling and administrative services to its authentication technology segment.
The Company
incurred expenses of $0, $39 thousands and $103 thousands for such services for the years ended
December 31, 2020,
2019 and
2018, respectively. In addition, the related party serves as a board member of
the Company, and was paid an amount of $38
thousands, $30 thousands and $15 thousands as board fees, for the years ended
December 31, 2020,
2019 and
2018, respectively.
In May 2019,
the Company engaged the services of Arrow to provide some administrative services.
The Company incurred expenses of $0.1 million for such services for each of the
years ended
December 31, 2020 and
2019.
In June 2019,
the Company issued 3,000,000 shares to certain directors and officers of
the Company for a purchase price of $0.40 per share. The Compensation Committee determines
the composition and amount of director and key employee compensation. When the annual award consists of equity purchases, it is only permitted at a price equal or above market.
In December 2019,
the Company purchased shares and shareholders debt of Arrow for $1.8 million.
In May 2020, an entity related to
the Company’s main shareholder provided a letter of credit of €2.0 million ($2.5 million as of
December 31, 2020) to a commercial bank to
guarantee a borrowing arrangement on behalf of one of
the Company’s
subsidiaries.
The Company provided to the related party a deposit of $2.2 million against the letter of credit which will be paid back to
the Company once the letter of credit will
be cancelled.
The Company has debt to related parties as described before in section
“Related Parties Financing”.
Item 8. Financial Information
The Consolidated Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-41.
Legal Proceedings
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities.
These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an
unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on
the Company's consolidated financial position,
results of operations, or cash flows.
Agency Agreements
In April 2013, prior to the purchase of one of the current
subsidiaries in Europe,
the Company entered into an agency agreement with a third party to assist it with this
transaction. According to the agreement, in the event that the operations in that country are sold in the future, the third-party agent is entitled to a payment of €3.0 million ($3.7 million as of
December 31, 2020).
In March 2016,
the Company entered into an agreement with a third party to assist
the Company with the possible sale of one of
the Company’s
subsidiaries. The fees depend on the
outcome of the assignment and are between 2% - 5% of the sale consideration but not less than $4.0 million. In February 2019 the agreement was amended. According to the amendment, in case that less than 50% of the voting stock or majority of the
subsidiary assets are being sold the transaction fee will be 5% of the sale consideration but not lower than $3.0 million.
In August 2017,
the Company entered into an agreement with a third party to assist
the Company with a possible sale of one of
the Company’s
subsidiaries. The fees depend on the
outcome of the assignment and are between 2% - 10% of the sale consideration but not less than € 2.0 million ($2.5 million as of
December 31, 2020).
Item 9. The Offer and Listing
Our shares of common stock are currently traded on the OTC under the symbol ICTSF.
The reported high and low closing sales prices per shares during the last five years were as follows:
|
Year
|
|
High
|
|
|
Low
|
|
|
2016
|
|
$
|
0.71
|
|
|
$
|
0.40
|
|
|
2017
|
|
$
|
1.30
|
|
|
$
|
0.45
|
|
|
2018
|
|
$
|
1.09
|
|
|
$
|
0.40
|
|
|
2019
|
|
$
|
3.00
|
|
|
$
|
0.15
|
|
|
2020
|
|
$
|
4.09
|
|
|
$
|
1.34
|
|
The reported high and low closing sales prices per share during each quarter for the last 3 years were as follows:
|
2020
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
4.09
|
|
|
$
|
2.40
|
|
|
Second quarter
|
|
$
|
3.00
|
|
|
$
|
1.34
|
|
|
Third quarter
|
|
$
|
3.35
|
|
|
$
|
2.56
|
|
|
Fourth quarter
|
|
$
|
4.00
|
|
|
$
|
2.31
|
|
| |
|
|
|
|
|
|
|
|
|
2019
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
0.26
|
|
|
$
|
0.25
|
|
|
Second quarter
|
|
$
|
0.25
|
|
|
$
|
0.15
|
|
|
Third quarter
|
|
$
|
1.45
|
|
|
$
|
0.19
|
|
|
Fourth quarter
|
|
$
|
3.00
|
|
|
$
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
1.09
|
|
|
$
|
0.60
|
|
|
Second quarter
|
|
$
|
0.80
|
|
|
$
|
0.40
|
|
|
Third quarter
|
|
$
|
0.80
|
|
|
$
|
0.47
|
|
|
Fourth quarter
|
|
$
|
0.48
|
|
|
$
|
0.40
|
|
Item 10. Additional Information
Introduction
ICTS is a public company with limited liability (naamloze vennootschap met beperkte aansprakelijkheid) incorporated under Dutch law on
October 9, 1992. ICTS’ statutory seat is in
Amstelveen, the Netherlands, and its registered office address at Schiphol, the Netherlands. ICTS is registered with the trade register of the Dutch Chamber of Commerce under number 33279300.
As a Dutch public company with limited liability, ICTS is subject to certain requirements not generally applicable to corporations organized under the laws of jurisdictions
within the United States of America. Set forth below is a summary of the material provisions of the
articles of association of ICTS as lastly amended on
January 4, 2021 (the
Articles of Association) and Dutch law, where appropriate. This summary
does not purport to be complete and is qualified in its entirety by reference to the
Articles of Association. All references in this summary to the Netherlands and Dutch law are to the European part of the Netherlands and its law, respectively,
only.
Corporate Objects
The objectives of ICTS are described in Article 2 of the
Articles of Association and include, without limitation, to manage and finance businesses, extend loans and invest
capital.
Share Capital
The shares of ICTS are subject to, and have been created under, the laws of the Netherlands. ICTS’ share capital is divided into common shares (Shares).
All Shares are in registered form (op naam) and are only available in the form of an entry in ICTS’ shareholders’ register.
Under Dutch law, ICTS’ authorized share capital sets out the maximum amount and number of shares that it may issue without amending its
Articles of Association. The Articles of
Association provide for an authorized share capital in an amount of EUR 67,500,000 divided into 150,000,000 Shares, each Share with a nominal value of EUR 0.45.
Issue of Shares and Pre-Emptive Rights
The General Meeting is authorized to issue Shares or to grant rights to subscribe for Shares and to restrict and/or exclude statutory pre-emptive rights in relation to the
issuance of Shares or the granting of rights to subscribe for Shares. The General Meeting may designate another body of ICTS competent to issue Shares (or grant rights to subscribe for Shares) and to determine the issue price and other conditions
of the issue for a specified period not exceeding five years (which period can be extended from time to time for further periods not exceeding five years) so long as the maximum number of Shares which may be issued is specified. Shares may not be
issued at less than their nominal value and must be fully paid-up upon issue. A resolution by the General Meeting to issue Shares (or grant rights to subscribe for Shares) or to designate another body as the competent corporate body requires an
absolute majority of the votes cast. Such resolution was adopted in December 2019 for a period of five years until December 2024. Designation by resolution of the General Meeting cannot be withdrawn unless determined otherwise at the time of
designation. No resolution is required for the issue of Shares pursuant to the exercise of a previously-granted right to subscribe for Shares.
Under Dutch law and the
Articles of Association, each Shareholder has a pre-emptive right in proportion to the aggregate nominal value of their shareholding upon the issue of
Shares (or the granting of rights to subscribe for Shares). Exceptions to this pre-emptive right include the issue of Shares (or the granting of rights to subscribe for Shares): (i) to employees of ICTS or another member of its Group; (ii) against
payment in kind (contribution other than in cash) and (iii) to persons exercising a previously-granted right to subscribe for Shares. The pre-emptive rights in respect of newly issued Shares or the granting of rights to subscribe for Shares may be
restricted or excluded by a resolution of the General Meeting. The General Meeting may designate another corporate body as competent to resolve upon the restriction or exclusion of the pre-emptive rights if such other corporate body has also been
designated as the competent body to resolve upon the issue of Shares for a specified period not exceeding five years (which period can be extended from time to time for further periods not exceeding five years). A resolution of the General Meeting
to exclude or restrict pre-emptive rights, or to authorize another corporate body to exclude or restrict pre-emptive rights, requires a majority of at least two thirds of the votes cast, if less than half of the issued share capital of ICTS is
present or represented at the General Meeting. Such resolution was adopted in December 2019 for a period of five years until December 2024. The resolution by with the pre-emptive rights are excluded or limited needs to be filed with the Netherlands
Chamber of Commerce within eight days of such resolution. A resolution designating another corporate body to resolve upon the restriction or exclusion of the pre-emptive rights cannot be withdrawn unless provided otherwise in such resolution.
Acquisition of Own Shares
ICTS cannot subscribe for Shares in its own capital at the time Shares are issued. Subject to the certain provisions of the
Articles of Association, ICTS may acquire fully
paid-up Shares provided no consideration is given or provided, (i) its shareholders’ equity less the payment required to make the acquisition, does not fall below the sum of called-up and paid-in share capital and any reserves to be maintained by
Dutch law and/or the
Articles of Association, (ii) ICTS and its
subsidiaries would thereafter not hold Shares or hold a pledge over Shares with an aggregate nominal value exceeding 50% of ICTS’ issued share capital and (iii) the Management Board
has been authorized thereto by the General Meeting. Any acquisition by ICTS of Shares that are not fully paid-up shall be null and void.
The General Meeting’s authorization to the Management Board to acquire own Shares is valid for a maximum of 18 months. As part of the authorization, the General Meeting must
specify the number of Shares that may be repurchased, the manner in which the Shares may be acquired and the price range within which the Shares may be acquired. The authorization is not required for the acquisition of Shares for employees of the
Company, under a scheme applicable to such employees. In 2020, the shareholders approved to amend the
articles of association, so that
the Company will be entitle to buy back up to 20% of the issued shares.
Shares held by
the Company in its own share capital do not carry a right to any distribution. Furthermore, no voting rights may be exercised for any of the Shares held by the
Company or its
subsidiaries unless such Shares are subject to the right of usufruct or to a pledge in favour of a person other than
the Company or its
subsidiaries and the voting rights were vested in the pledgee or usufructuary before
the Company
or its
subsidiaries acquired such Shares.
The Company or its
subsidiaries may not exercise voting rights in respect of Shares for which
the Company or its
subsidiaries have a right of usufruct or a pledge.
Reduction of Share Capital
The General Meeting may resolve to reduce the issued share capital by (i) cancelling Shares or (ii) amending the
Articles of Association to reduce the nominal value of the Shares
of ICTS. In either case, this reduction would be subject to provisions of Dutch law and the
Articles of Association. Only Shares held by ICTS or Shares for which it holds the depositary receipts may be cancelled. Under Dutch law, a resolution of
the General Meeting to reduce the number of Shares must designate the shares to which the resolution applies and must lay down rules for the implementation of the resolution. A resolution by the General Meeting to reduce the issued share capital of
ICTS must be approved by at least a two third majority of the votes cast, in a meeting in which holders of more than half of ICTS’ issued and outstanding share capital is present or represented.
Dividends
Pursuant to Dutch law and the
Articles of Association, the distribution of profits will take place following the adoption of ICTS’ annual accounts by the General Meeting, from
which ICTS will determine whether such distribution is permitted. ICTS may make distributions to the Shareholders, whether from profits or from its freely distributable reserves, only insofar as its shareholders’ equity exceeds the sum of the
paid-up and called-up share capital plus the reserves required to be maintained by Dutch law or pursuant to the
Articles of Association.
Subject to Dutch law and the
Articles of Association, the Supervisory Board may determine which part of ICTS’ profits as per its financial statements for the relevant financial
year will be added to the reserves. The remaining part of the profits will be at the disposal of the General Meeting.
Subject to Dutch law and the
Articles of Association, the Management Board, with the prior approval of the Supervisory Board, may resolve to distribute an interim dividend if it
determines such interim dividend to be justified by ICTS’ profits. For this purpose, the Management Board must prepare an interim statement of assets and liabilities. Such interim statement shall show the financial position of ICTS not earlier than
on the first day of the third month before the month in which the resolution to make the interim distribution is announced. An interim dividend can only be paid if (a) an interim statement of assets and liabilities is drawn up showing that the
funds available for distribution are sufficient, and (b) ICTS’ shareholders’ equity exceeds the sum of the paid-up and called-up share capital plus the reserves required to be maintained by Dutch law.
An entitlement to any dividend distribution shall be barred five years after the date on which those dividends were released for payment.
General Meeting of Shareholders
Annual General Meeting
The General Meeting will be held at least once a year and no later than six months from the end of the preceding financial year of ICTS. The purpose of the annual General Meeting
is to discuss, amongst other things, the annual report, the adoption of the annual accounts, allocation of profits (including the proposal to distribute dividends), release of the Managing Directors from liability for their management and the
Supervisory Directors from liability for their supervision thereon, filling of any vacancies and other proposals brought up for discussion by the Management Board and the Supervisory Board.
Convocation Notice and Agenda
A General Meeting can be convened by the Management Board or the Supervisory Board by a convening notice. Notices convening a general meeting will be mailed to holders of
registered shares at least 15 days before the General Meeting and will be published in a national newspaper in the Netherlands and otherwise in other countries as required pursuant to the relevant laws where ICTS’ Shares have been admitted to
trading on a trading facility.
Extraordinary General Meeting
Other General meetings may be held as often as deemed necessary by the Management Board and Supervisory Board and must be held if one or more Shareholders or other persons
entitled to attend the general meeting jointly representing at least 10% of ICTS’ issued share capital make a written request to the Management Board or the Supervisory Board that a meeting must be held and specifying in detail the business to be
dealt with at such meeting.
Agenda
Under Dutch law, one or more Shareholders representing solely or jointly at least 3% of the ICTS’ issued and outstanding share capital in value are entitled to request the
Management Board to include items on the agenda of the General Meeting.
Place General Meeting
General Meetings are held in Amstelveen, the Netherlands (the place of the statutory seat of ICTS) or in Amsterdam, Rotterdam, Schiphol Oost or The Hague, the Netherlands.
Admission
All shareholders of ICTS, and each usufructuary and pledgee to whom the right to vote on Shares accrues, are entitled, in person or represented by a proxy authorized in writing,
to attend and address the General Meeting and exercise voting rights pro rata to their shareholding.
In order to attend, address and vote at the General Meeting, the holders of ICTS’ registered shares must notify it in writing of their intention to attend the meeting and holders
of ICTS’ Shares admitted to trading on a trading facility must direct the depository to their Shares, each as specified in the published notice. However, Shareholders and other persons entitled to attend the General Meeting may be represented by
proxies with written authority.
Voting Rights
Each Share confers the right on the holder to cast one vote at the General Meeting. Resolutions are passed by an absolute majority of the votes cast provided a quorum of at least
50% of the outstanding share capital is represented, unless Dutch law or the
Articles of Association prescribe a larger majority. Under Dutch law, no votes may be cast at a General Meeting in respect of Shares which are held by ICTS itself.
Management Structure
ICTS has a two-tier board structure comprising of the Management Board (bestuur) and the Supervisory Board (raad van commissarissen).
The Management Board is collectively responsible for ICTS’ general affairs and is in charge of the day-to-day management, formulating strategies and policies, and setting and
achieving ICTS’ objectives. The Supervisory Board supervises the Management Board and the general affairs of ICTS and the business connected with it and provides the Management Board with advice.
Management Board
Powers, Responsibilities and Function
The Management Board is the executive body of ICTS, collectively responsible for, among other things, defining and attaining ICTS’ objectives, determining ICTS’ strategy and risk
management policy, the day-to-day management, the ICTS’ general affairs and ICTS’ representation, subject to the supervision of the Supervisory Board. The Management Board may perform all acts necessary or useful for achieving ICTS’ objectives,
with the exception of those acts that are prohibited by law or by the
Articles of Association. The Management Board may allocate its responsibilities and powers to its individual members. All Managing Directors remain collectively responsible for
proper management regardless of the allocation of tasks. In performing their duties, the Managing Directors must carefully consider and shall act in accordance with the interests of ICTS and the business connected with it, taking into consideration
the interests of all corporate stakeholders, such as Shareholders, creditors, employees, customers, patient populations and suppliers.
Subject to certain statutory exceptions, the Management Board as a whole is authorized to represent ICTS. In addition, should the Management Board be comprised of two or more
members, two Managing Directors acting jointly are also authorized to represent ICTS.
Composition, Appointment, Term of Appointment and Dismissal
The
Articles of Association provide that the Management Board shall consist of one or more members and that the General Meeting determines the exact number of Managing Directors.
The General Meeting appoints the Managing Directors. Managing Directors are appointed by the General meeting for an indefinite period.
The General Meeting and the Supervisory Board may suspend Managing Directors at any time, and the General Meeting may remove Managing Directors at any time. A General Meeting
must be held within three months after a suspension of a Managing Director has taken effect, in which meeting a resolution must be adopted to either terminate or extend the suspension, provided that in the case that such suspension is not
terminated, the suspension does not last longer than three months in aggregate. The suspended Managing Director must be given the opportunity to account for his or her actions at that meeting. If neither such resolution is adopted nor the General
Meeting has resolved to dismiss the Managing Director, the suspension will cease after the period of suspension has expired.
Decision-Making
In a meeting of the Management Board, each Managing Director is entitled to cast one vote. All resolutions by the Management Board are adopted by the favourable vote of a
majority of the Managing Directors present or represented at the meeting (and in respect of whom no conflict of interest exists).
The Supervisory Board may also adopt resolutions outside a meeting, in writing or otherwise, provided that the proposal concerned is submitted to all Managing Directors then in
office (and in respect of whom no conflict of interest exists) and provided that none of them objects to such decision-making process. Resolutions in writing shall be adopted by written statements from all relevant Managing Directors then in office
in respect of whom no conflict of interest exists.
Conflicts of Interests
A Managing Director shall not participate in any discussions and decision-making process if he or she has a direct or indirect personal interest conflicting with the interests of
the Company. Such a conflict of interest only exists if in the situation at hand the Managing Director is deemed to be unable to serve
the Company’s interest and its connected business with the required level of integrity and objectivity. If for
this reason no resolution can be taken by the Managing Directors, the Supervisory Board will resolve on the matter.
Supervisory Board
Powers, Responsibilities and Function
The role of the Supervisory Board is to supervise the conduct and policies of the Management Board and the general affairs of ICTS and the business connected with it as well as
to provide the Management Board with advice. The Supervisory Directors are not authorized to represent ICTS. In performing their duties, the Supervisory Directors are required to be guided by the interests of ICTS and the business connected with
it, and shall consider the interests of the ICTS’ stakeholders, which include but are not limited to its shareholders, creditors, employees, customers and suppliers. The Supervisory Board may, at ICTS’ expense, seek the advice which it deems
desirable for the correct performance of its duties.
Composition, Appointment, Term of Appointment and Dismissal
The
Articles of Association provide that the Supervisory Board shall consist of one or more members and that the General Meeting determines the exact number of Supervisory
Directors.
The members of the Supervisory Board are appointed by the General Meeting for a term of one year.
The General Meeting may suspend and remove Supervisory Directors at any time. A General Meeting must be held within three months after a suspension of a Supervisory Director has
taken effect, in which meeting a resolution must be adopted to either terminate or extend the suspension, provided that in the case that such suspension is not terminated, the suspension does not last longer than three months in aggregate. The
suspended Supervisory Director must be given the opportunity to account for his or her actions at that meeting. If neither such resolution is adopted nor the General Meeting has resolved to dismiss the Supervisory Director, the suspension will
cease after the period of suspension has expired.
Decision-Making
In a meeting of the Supervisory Board, each Supervisory Director is entitled to cast one vote. A Supervisory Director may grant a written proxy to another Supervisory Director
(if in office) to represent him at a meeting. All resolutions by the Supervisory Board are adopted by the favourable vote of a majority of the Supervisory Directors present or represented at the meeting (and in respect of whom no conflict of
interest exists).
The Supervisory Board may also adopt resolutions outside a meeting, in writing or otherwise, provided that the proposal concerned is submitted to all Supervisory Directors then
in office (and in respect of whom no conflict of interest exists) and provided that none of them objects to such decision-making process. Adoption of resolutions in writing shall be adopted by written statements from all relevant Supervisory
Directors then in office in respect of whom no conflict of interest exists.
Conflicts of Interests
A Supervisory Director shall not participate in any discussions and decision-making process if he or she has a direct or indirect personal interest conflicting with the interests
of
the Company. Such a conflict of interest only exists if in the situation at hand the Supervisory Director is deemed to be unable to serve
the Company’s interest and its connected business with the required level of integrity and objectivity. If
for this reason no resolution can be taken by the Supervisory Directors, the General Meeting will resolve on the matter.
Financial Year and Annual Accounts
The financial year of ICTS coincides with the calendar year. Annually within five months after the end of the financial year, the Management Board prepares the annual accounts.
The annual accounts must be accompanied by the Report of Independent Registered Public Accounting Firm, an annual report, a report by the Management Board and a report by the Supervisory Board and certain other information required under Dutch law.
All Managing Directors and Supervisory Board sign the annual accounts and if one of them does not so sign, the reason for this omission must be stated. The Management Board must make the annual accounts, the annual report and other information
required under Dutch law available for inspection by the Shareholders and other persons entitled to attend and address the General Meeting at the offices of ICTS from the day of the notice convening the annual General Meeting. The annual accounts
must be adopted by the General Meeting at the annual General Meeting.
Contrary to what is provided in Article 19 paragraph 4 of the
Articles of Association, approval of the annual accounts by the Shareholders does not discharge the Managing
Directors and the Supervisory Board from liability for the performance of their respective duties for the past financial year. In order to discharge the Managing Directors and Supervisory Board from liability a separate resolution thereto needs to
be adopted by the General Meeting (which resolution can be adopted in the same meeting in which the annual accounts will be adopted). Under Dutch law, this discharge is not absolute and will not be effective with respect to matters which are not
disclosed to the Shareholders.
Only the General Meeting may resolve to amend the
Articles of Association. A proposal to amend the
Articles of Association must be included in the notice convening the General
Meeting. A copy of the proposal containing the verbatim text of the proposed amendment must be available at ICTS for inspection by every shareholder of ICTS and every holder of meeting right until the end of the General Meeting.
A resolution by the General Meeting to amend the
Articles of Association must be approved by at least a two third majority of the votes cast, in a meeting in which holders of
more than half of ICTS’ issued and outstanding share capital is present or represented.
Dissolution and Liquidation
A proposal to dissolve ICTS must be included in the notice convening the General Meeting. A resolution by the General Meeting to dissolve ICTS must be approved by at least a two
third majority of the votes cast, in a meeting in which holders of more than half of ICTS’ issued and outstanding share capital is present or represented.
If the General Meeting has resolved to dissolve ICTS, the Managing Directors will be charged with the liquidation of the business of ICTS in accordance with Dutch law and the
Articles of Association under supervision of the Supervisory Board. During liquidation, the provisions of the
Articles of Association will remain in force as far as possible.
Any surplus remaining after settlement of all debts and liquidation costs will be distributed to the Shareholders in proportion to the nominal value of their shareholdings.
Exchange controls
There are no governmental laws, decrees or regulations in The Netherlands, ICTS’ jurisdiction of organization, that restrict ICTS’ export or import of capital in any material
respect, including, but not limited to, foreign exchange controls.
There are no limitations imposed by Dutch law or ICTS’ charter documents on the right of non-resident or foreign owners to hold or vote Shares.
Taxation
The following discussion summarizes the material anticipated U.S. federal income tax consequences of the acquisition, ownership and disposition of shares by a U.S. Holder (as
defined below). This summary deals only with shares held as capital assets and does not deal with the tax consequences applicable to all categories of investors some of which (such as tax-exempt entities, banks, broker-dealers, investors who hold
shares as part of hedging or conversion transactions and investors whose functional currency is not the U.S. dollar) may be subject to special rules.
The summary does not purport to be a complete analysis or listing of all the potential tax consequences of holding shares, nor does it purport to furnish information in the same
detail or with the attention to an investor's specific tax circumstances that would be provided by an investor's own tax adviser. Accordingly, U.S. holders of shares are advised to consult their own tax advisers with respect to their particular
circumstances and with respect to the effects of U.S. federal, state, local, or other laws to which they may be subject.
As used herein, the term "U.S. Holder" means a beneficial owner of shares that is (i) for United States federal income tax purposes a citizen or resident of the United States of
America, (ii) a corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof, (iii) a trust if a court within the United States of America is able to exercise primary supervision
over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or (iv) an estate, the income of which is subject to United States federal income taxation regardless
of its source.
The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), judicial decisions, administrative pronouncements, and existing and proposed Treasury
Department regulations, changes to any of which after the date of this Annual Report on Form 20-F could apply on a retroactive basis and affect the tax consequences described herein.
Taxation of Dividends
For U.S. federal income tax purposes, the gross amount of distributions, if any, (including any withholding tax thereon) made by
the Company out of its current or accumulated
earnings and profits (as determined under U.S. federal income tax principles) will be included in the gross income of a direct U.S. Holder as foreign source dividend income on the date of receipt but in the case of a U.S. Holder that is a
corporation, generally will not be eligible for the dividends received deduction allowed to U.S. corporations unless
the Company constitutes a so-called
“specified 10%-owned foreign corporation” with respect to such a U.S. Holder.
Subject to the discussion below regarding passive foreign investment companies,
the Company should be considered to be a
“qualified foreign corporation” so that such dividends
should be eligible to be taxed as net capital gains (at a maximum U.S. federal rate of 20 percent in the hands of a non-corporate U.S. Holder) plus pontentially a net investment income tax (for non-corporate U.S. Holders) at a maximum rate of 3.8%.
Distributions in excess of the earnings and profits of
the Company will be treated, for U.S. federal income tax purposes, first as a non-taxable return of capital to the extent
of the U.S. Holder's basis in the shares (thereby increasing the amount of any gain and decreasing the amount of any loss realized on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount
of any dividend paid in Euros will be determined based on the U.S. dollar value of the Euro on the date of receipt regardless of whether the U.S. Holder converts the payment into U.S. dollars.
The declaration of dividends will be at the discretion of
the Company’s Supervisory Board of directors and will depend upon
the Company’s earnings, capital requirements,
financial position, general economic conditions, and other pertinent factors.
The Company cannot assure Holders that dividends will be paid in the future.
Foreign Tax Credits
U.S. Holders will generally be entitled to claim a credit against their United States federal income tax liability for the amount of Netherlands dividend withholding tax imposed
on dividends paid to U.S. Holders.
See Netherlands Dividend Withholding Tax. U.S. Holders who are entitled to the benefits of a reduced rate of Netherlands dividend withholding tax under the tax treaty between the
United States of America and the Netherlands will be allowed a credit for only the amount of withholding tax provided for under the U.S. Tax Treaty (generally 15%).
However, the full amount of the dividend, including any withheld amounts, generally will be subject to current United States federal income taxation whether or not such Holder
obtaines the benefit of a credit for the amount withheld. In the event
the Company pays a dividend to a U.S. Holder out of the earnings of a non-Dutch subsidiary, however, it is possible that under certain circumstances that such U.S. Holder would
not be entitled to claim a credit for a portion of any Dutch taxes withheld by
the Company from such dividend. Based on historic economics, the portion of Dutch withholding tax that may not be creditable in this instance should equal a maximum of
3% of the gross amount of such dividend (or 20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a 15% withholding rate under the U.S. Tax Treaty). This limitation would potentially apply only under circumstances where the
Company pays dividends on the shares.
Depending on the particular circumstances of the U.S. Holder, dividends accrued from shares will generally be classified, for foreign tax credit purposes, as passive income. A
U.S. Holder who finds it more advantageous because of such limitations to claim the Netherlands dividend withholding tax as a deduction instead of a credit may do so, but only for a year for which such Holder does not claim a credit for any foreign
taxes. If the U.S. Holder is a U.S. partnership, trust, or estate, any tax credit is available only to the extent that the income derived by such partnership, trust, or estate is subject to U.S. tax on the income of a resident either in its hands
or in the hands of its partners or beneficiaries, as the case may be.
Taxation on Sale or Disposition of Shares
Subject to the discussion below regarding passive foreign investment companies, U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes on the sale
or other disposition of shares in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted tax basis in the shares will be
equal to the amount paid by the U.S. Holder for such shares reduced by any distribution in excess of the earnings and profits of
the Company.
For shares held for one year or less, any such gain or loss will generally be treated as short-term gain or loss. Short-term capital gains are taxed at the same rate as ordinary
income.
If the shares have been held for more than a year, any such gain or loss will generally be treated as long-term capital gain or loss. U.S. Holders are advised to consult a
competent tax adviser regarding applicable capital gains tax provisions and sourcing of capital gains and losses for foreign tax credit purposes.
Gift and Estate Tax
An individual U.S. Holder may be subject to U.S. gift and estate taxes on shares in the same manner and to the same extent as on other types of personal property.
Backup Withholding and Information Reporting
Payments in respect of the shares may be subject to information reporting to the IRS and to a 24% U.S. backup withholding tax. Backup withholding generally will not apply,
however, to a Holder who furnishes a correct U.S. taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide
such certification on Form W-9 (Request for Taxpayer Identification Number and Certification) and a non-US Holder will provide such certification on a version of Form W-8 (Certificate of Foreign Status).
Passive Foreign Investment Company
Management has determined that
the Company has not been a passive foreign investment company (
“PFIC”) for United States federal income tax purposes for prior taxable years and
believes that
the Company will not be treated as a PFIC for the current and future taxable years, but this conclusion is a factual determination made annually and thus subject to change.
The Company would be a PFIC with respect to a U.S. Holder if,
for any taxable year in which such U.S. Holder held shares, either (i) at least 75% of
the Company’s gross income for the taxable year is passive income, or (ii) at least 50% of
the Company’s assets are assets that produce or are held for the
production of passive income. Under a
“look-through” rule, a corporation takes into account a pro rata share of the income and the assets of any corporation in which it owns, directly or indirectly, 25% or more of the stock by value.
Passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from the active conduct of a trade or business and not derived
from a related person), annuities, and gains from assets that produce passive income. The 50% asset test would apply to
the Company based on fair market values.
If
the Company is a PFIC for any taxable year during which a U.S. Holder holds shares, the U.S. Holder will be subject to special tax rules with respect to:
Any “excess distribution” that the U.S. Holder receives on shares, and any gain the U.S. Holder realizes from a sale or other disposition (including a pledge) of the shares
unless the U.S. Holder makes a “qualified electing fund” or “mark-to-market” election as discussed below.
Distributions the U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received during the shorter of the three
preceding taxable years or the U.S. Holder’s holding period for the shares will be treated as an excess distribution. Under these special tax rules:
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The excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the shares,
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The amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which the Company was a PFIC, will be treated as ordinary income, and |
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The amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each
such year.
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The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses, and gains (but not
losses) realized on the sale of the shares cannot be treated as capital, even if the U.S. Holder holds the shares as capital assets.
If
the Company were to become a PFIC, a U.S. Holder may avoid taxation under the excess distribution rules discussed above by making a
“qualified electing fund” election to
include the U.S. Holder’s share of
the Company’s income on a current basis. However, a U.S. Holder may make a qualified electing fund election only if
the Company, as a PFIC, agrees to furnish the shareholder annually with certain tax information.
Management has not decided whether, under such circumstances,
the Company would prepare or provide such information. Alternatively, if
the Company were to become a PFIC, a U.S. Holder might, depending on the volume of trading of our stock, make a
mark-to-market election to elect out of the excess distribution rules discussed above.
If a U.S. Holder made a mark-to-market election for the shares, the U.S. Holder would include in income each year an amount equal to the excess, if any, of the fair market value
of the shares as of the close of the U.S. Holder’s taxable year over the U.S. Holder’s adjusted basis in such shares. A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their fair market value as
of the close of the taxable year only to the extent of any net mark-to-market gains on the shares included in the U.S. Holder’s income for prior taxable years. Amounts included in a U.S. Holder’s income under a mark-to-market election, as well as
gain on the actual sale or other dispositions of the shares are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale
or disposition of the shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares. A U.S. Holder’s basis in the shares will be adjusted to reflect any such income or loss
amounts.
The mark-to-market election is available only for stock which is regularly traded on a national securities exchange that is registered with the Securities and Exchange
Commission, or the national market system established pursuant to section 11A of the Exchange Act, or any exchange or market that the IRS has determined has rules sufficient to carry out the purposes of the income tax rules. There can be no
assurance that
the Company will continue to satisfy the requirements of the mark-to-market election.
Taxes in the Netherlands
Corporate Income Tax – General
We are incorporated under the laws of the Netherlands and are therefore subject to Netherlands corporate income tax. As of 2020, the standard corporate income tax rate is 16.5%
on profits up to €0.2 million and 25% on the excess. In 2021, the statutory corporate income tax rates will be lowered further to 15% and 25%, respectively. In 2022 the statutory corporate income tax rates will be 15% on profits up to €0.4 million
and 25%, on the excess.
ICTS and a number of our Netherlands resident
subsidiaries form a fiscal unity for Netherlands corporate income tax purposes. As a result, corporate income tax is levied from
these entities on a consolidated basis at the level of ICTS.
For Netherlands corporate income tax purposes, affiliated entities should calculate their profits on an “at arm’s length” basis. In case transactions between such affiliated
entities are made or imposed on conditions (transfer prices) which differ from those conditions which would have been made or imposed between independent entities in the free market, the profits of those entities are determined as if the “at arm’s
length” conditions had been agreed.
Participation Exemption
Pursuant to the Netherlands participation exemption, income and capital gains derived from the investment by a parent company in a qualifying subsidiary are exempt from corporate
income tax provided that the parent company meets the 5 per cent threshold test, and the participation is not considered to be a portfolio investment. The 5 per cent threshold test requires that the parent company (i) owns at least 5 per cent of
the nominal share capital in the subsidiary, or (ii) is shareholder in and related to the subsidiary, whilst an entity related to the parent owns at least 5 per cent of the nominal share capital in the subsidiary, or (iii) has owned for an
uninterrupted period of at least one year at least 5 per cent of the nominal share capital in subsidiary and three years have not yet passed after the shareholding by the parent in the subsidiary dropped below 5 per cent.
If the parent company holds its participation in the subsidiary as a portfolio investment, the participation exemption is not applicable, unless it qualifies as a “qualifying
portfolio investment”. A portfolio investment is a shareholding in a subsidiary that is held by the parent with the intent of realizing a return on investment that can be expected from normal, active asset management activities. This is a
subjective facts and circumstances test. The specific purpose for making the investment in the subsidiary must be analysed on a case-by-case basis taking into account all of the relevant facts and circumstances.
A parent company would generally not be considered to hold the participation in the subsidiary company as a portfolio investment, if the business carried on by the subsidiary
company is in line with the business carried on by the parent company. This should normally also apply to a holding company, which, based on its activities on a managerial, policy-making or financial level, performs a material function for the
benefit of the group of companies that it forms part of, or to an intermediate holding company in case this company plays a linking role between the business activities of its parent company and the business activities of its subsidiary companies.
The subsidiary would be deemed to be held as a portfolio investment by the parent company if (i) the assets of the subsidiary usually consist, on a consolidated basis, for more
than 50 per cent. of shareholdings (and similar rights) of less than 5 per cent. in other entities or (ii) the subsidiary company’s activities consist for more than 50% of group financing activities. Group financing includes loans, credit
instruments and also leasing of equipment, intangibles and other assets.
If the parent company would (be deemed to) hold the participation in the subsidiary as a portfolio investment, such portfolio investment may still qualify for the application of
the participation exemption if (i) the subsidiary is subject to an income/profits tax resulting in an effective tax burden that is realistic under Netherlands principles, or (ii) the assets of the subsidiary, directly or indirectly, usually consist
for less than 50 per cent of low-taxed free investments.
Apart from special provisions in relation to certain liquidation losses, capital losses incurred in relation to qualifying participations are not deductible for Netherlands
corporate income tax purposes
Costs related to the acquisition of qualifying participations are generally not deductible. Costs related to the disposal of qualifying participations are also generally not
deductible. Other expenses relating to participations (e.g. the cost of financing) are in principle deductible.
The participation exemption does not apply to accrued payments (of dividend, interest, or other) that are tax-deductible in the country of the debtor, whereas the corresponding
income is exempt under the scope of the participation exemption. This will be the case e.g. if the country of the debtor qualifies the distribution as an interest expense, whereas the Netherlands qualifies the income as a dividend.
In case the participation exemption is applicable, income in the hands of ICTS arising from dividends paid by
subsidiaries or capital gains from the disposal of its shares in
such
subsidiaries are exempt from corporate income tax in the Netherlands.
If the participation exemption is not applicable, income derived by ICTS from a subsidiary will be taxed at the statutory corporate income tax rates.
Interest Deduction Limitations
As of 1 January 2019, the Netherlands has implemented the generic interest stripping rule provided for in the EU Anti-Tax Avoidance Directive (“ATAD”) into domestic law. The
earnings stripping rule limits the possibility to deduct “excess” interest costs (i.e. the balance of interest costs and interest income) to 30% of a taxpayer’s EBITDA. The earnings stripping rule provides for a €1.0 million threshold, which means
that the deduction of excess interest costs up to €1.0 million will not be restricted.
Besides the earnings stripping rule, Netherlands tax law includes other anti-abuse provisions in relation to the deductibility of interest. In addition, interest deductions may be disallowed based
on the abuse of law doctrine (“fraud legis”).
Loss Compensation
According to Netherlands tax law, losses incurred may be carried back for one year. As of January 1 2019, the possibility to carry forward losses is limited from nine years to
six years.
Depreciation Limitations
For Netherlands corporate income tax purposes, restrictions apply to the depreciation of goodwill, real estate and other business assets. The maximum yearly depreciation charge
for acquired goodwill is 10% of its cost price. Depreciation of real estate property is not allowed in case the book value of the property falls below 100% of the value used for purposes of the Valuation of Immovable Property Act (“WOZ value”). The
maximum yearly depreciation charge for other business assets is 20% of the cost price of such assets. In certain situations, it should still, however, be possible to value assets at lower going-concern value.
Netherlands Tax Considerations of Holding Shares
The following summary outlines certain Netherlands tax consequences in connection with the acquisition, ownership and disposal of Shares. All references in this summary to the
Netherlands and Dutch law are to the European part of the Netherlands and its law, respectively, only. The summary does not purport to present any comprehensive or complete picture of all Netherlands tax aspects that could be of relevance to the
acquisition, ownership and disposal of Shares by a (prospective) holder of Shares who may be subject to special tax treatment under applicable law. The summary is based on the tax laws and practice of the Netherlands as in effect on the date of
this Prospectus, which are subject to changes that could prospectively or retrospectively affect the Netherlands tax consequences.
For purposes of Netherlands income and corporate income tax, Shares legally owned by a third party such as a trustee, foundation or similar entity or arrangement (a Third Party),
may under certain circumstances have to be allocated to the (deemed) settlor, grantor or similar originator (the Settlor) or, upon the death of the Settlor, his/her beneficiaries (the Beneficiaries) in proportion to their entitlement to the estate
of the Settlor of such trust or similar arrangement (the Separated Private Assets).
The summary does not address the tax consequences of a holder of Shares who is an individual and who has a substantial interest in ICTS. Generally, a holder of Shares will have a
substantial interest in ICTS if such holder of Shares, whether alone or together with his spouse or partner and/or certain other close relatives, holds directly or indirectly, or as Settlor or Beneficiary of Separated Private Assets (i) the
ownership of, or certain other rights, such as usufruct, over, or rights to acquire (whether or not already issued), shares representing 5% or more of the total issued and outstanding capital (or the issued and outstanding capital of any class of
shares) of ICTS or (ii) the ownership of, or certain other rights, such as usufruct over, profit participating certificates (winstbewijzen) that relate to 5% or more of the annual profit of ICTS or to 5% or more of the liquidation proceeds of ICTS.
In addition, a holder of Shares has a substantial interest in ICTS if he, whether alone or together with his spouse or partner and/or certain other close relatives, has the
ownership of, or other rights over, shares in, or profit certificates issued by, ICTS that represent less than 5% of the relevant aggregate that either (a) qualified as part of a substantial interest as set forth above and where shares, profit
certificates and/or rights there over have been, or are deemed to have been, partially disposed of, or (b) have been acquired as part of a transaction that qualified for non-recognition of gain treatment.
This summary does not address the tax consequences of a holder of Shares who:
(a) receives income or realises capital gains in connection with his or her employment activities or in his/her capacity as (former) Management Board member and/or (former)
Supervisory Board member; or
(b) is a resident of any non-European part of the Netherlands.
Prospective holders of Shares should consult their own professional adviser with respect to the tax consequences of any acquisition, ownership or disposal of Shares in their
individual circumstances.
Dividend Withholding Tax
General
ICTS is generally required to withhold dividend withholding tax imposed by the Netherlands at a rate of 15% on dividends distributed by ICTS in respect of Shares. The expression
“dividends distributed by ICTS” as used herein includes, but is not limited to:
(a) distributions in cash or in kind, deemed and constructive distributions and repayments of paid-in capital (“gestort kapitaal”) not recognised for Netherlands dividend
withholding tax purposes;
(b) liquidation proceeds, proceeds of redemption of Shares or, as a rule, consideration for the repurchase of Shares by ICTS in excess of the average paid-in capital recognised
for Netherlands dividend withholding tax purposes;
(c) the par value of Shares issued to a holder of Shares or an increase of the par value of Shares, to the extent that it does not appear that a contribution, recognised for
Netherlands dividend withholding tax purposes, has been made or will be made; and
(d) partial repayment of paid-in capital, recognised for Netherlands dividend withholding tax purposes, if and to the extent that there are net profits (zuivere winst), unless
(i) the General Meeting has resolved in advance to make such repayment and (ii) the par value of the Shares concerned has been reduced by an equal amount by way of an amendment of the
Articles of Association of ICTS.
Holders of Shares Resident in the Netherlands
A holder of Shares that is resident or deemed to be resident in the Netherlands is generally entitled, subject to the anti-dividend stripping rules described below, to a full
credit against its (corporate) income tax liability, or a full refund, of the Netherlands dividend withholding tax.
Holders of Shares Resident Outside the Netherlands
A holder of Shares that is resident in a country with which the Netherlands has a double taxation convention in effect, may, depending on the terms of such double taxation
convention and subject to the anti-dividend stripping rules described below, be eligible for a full or partial exemption from, or full or partial refund of, Netherlands dividend withholding tax on dividends received.
A holder of Shares that is a legal entity (a) resident in (i) a Member State of the European Union, (ii) Iceland, Norway or Liechtenstein, or (iii) a country with which the
Netherlands has concluded a tax treaty that includes an article on dividends and (b) that is in its state of residence under the terms of a double taxation agreement concluded with a third state, not considered to be resident for tax purposes in a
country with which the Netherlands has not concluded a tax treaty that includes an article on dividends (not being a Member State of the European Union, Iceland, Norway or Liechtenstein), is generally entitled, subject to the anti-abuse rules and
the anti-dividend stripping rules described below, to a full exemption from Netherlands dividend withholding tax on dividends received if it holds an interest of at least 5% (in shares or, in certain cases, in voting rights) in ICTS or if it holds
an interest of less than 5%, in either case where, had the holder of Shares been a Netherlands resident, it would have had the benefit of the participation exemption (this may include a situation where another related party holds an interest of 5%
or more in
the company).
The full exemption from Netherlands dividend withholding tax on dividends received by a holder of Shares that is a legal entity (a) resident in (i) a Member State of the European
Union, (ii) Iceland, Norway or Liechtenstein, or (iii) a country with which the Netherlands has concluded a tax treaty that includes an article on dividends is not granted if the interest held by such holder (i) is held with the avoidance of
Netherlands dividend withholding tax of another person as (one of) the main purpose(s) and (ii) forms part of an artificial structure or series of structures (such as structures which are not put into place for valid business reasons reflecting
economic reality).
A holder of Shares that is an entity resident in (i) a Member State of the European Union, or (ii) Iceland, Norway or Liechtenstein, or (iii) in a jurisdiction which has an
arrangement for the exchange of tax information with the Netherlands (and such holder as described under (iii) holds the Shares as a portfolio investment, i.e., such holding is not acquired with a view to the establishment or maintenance of lasting
and direct economic links between the holder of Shares and ICTS and does not allow the holder of Shares to participate effectively in the management or control of ICTS), which is exempt from tax in its country of residence and does not have a
similar function to a qualifying investment institution (fiscale beleggingsinstelling) or a qualifying exempt investment institution (vrijgestelde beleggingsinstelling), and that would have been exempt from Netherlands corporate income tax if it
had been a resident of the Netherlands, is generally entitled, subject to the anti-dividend stripping rules described below, to a full refund of Netherlands dividend withholding tax on dividends received. This full refund will in general benefit
certain foreign pension funds, government agencies and certain government controlled commercial entities.
According to the anti-dividend stripping rules, no exemption, reduction, credit or refund of Netherlands dividend withholding tax will be granted if the recipient of the dividend
paid by
the company is not considered the beneficial owner (uiteindelijk gerechtigde) of the dividend as defined in these rules. A recipient of a dividend is not considered the beneficial owner of the dividend if, as a consequence of a combination
of transactions, (i) a person (other than the holder of the dividend coupon), directly or indirectly, partly or wholly benefits from the dividend, (ii) such person directly or indirectly retains or acquires a comparable interest in Shares, and
(iii) such person is entitled to a less favourable exemption, refund or credit of dividend withholding tax than the recipient of the dividend distribution. The term
“combination of transactions” includes transactions that have been entered into in
the anonymity of a regulated stock market, the sole acquisition of one or more dividend coupons and the establishment of short-term rights or enjoyment on Shares (e.g., usufruct).
Holders of Shares Resident in the U.S.
Dividends paid to U.S. resident holders of Shares that are eligible for benefits under the Convention between the Netherlands and the United States of America for the avoidance
of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes and Income, dated 18 December 1992 as amended by the protocol of 8 March 2004 (the U.S. Tax Treaty) are generally subject to a reduced dividend withholding tax rate of 5%
in case of certain U.S. corporate shareholders owning at least 10% of ICTS’ total voting power. Certain U.S. pension funds and tax-exempt organisations may qualify for a complete exemption from Netherlands dividend withholding tax.
Under the U.S. Tax Treaty such benefits are generally available to U.S. residents if such resident is the beneficial owner of the dividends, provided that such shareholder does
not have an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment or permanent representative in the Netherlands and to which enterprise or part of an enterprise Shares are
attributable. A person may, however, not claim the benefits of the U.S. Tax Treaty if such person’s entitlement to such benefits is limited by the provisions of Article 26 (the limitation on benefits provision) of the U.S. Tax Treaty. The reduced
dividend withholding tax rate can generally be applied at source upon the distribution of the dividends, provided that the proper forms have been filed in advance of the distribution. In the case of certain tax-exempt organisations, as a general
rule, the so-called refund method applies; only when certain administrative conditions have been fulfilled may such tax-exempt organisation use the exemption method.
Irrespective of meeting the conditions of the relevant provisions of U.S. Tax Treaty, dividends distributed by
the company to a U.S. resident holder (i) who is a legal entity
resident in the U.S. and (ii) that is in the U.S. under the terms of a double taxation agreement with a third state not considered to be resident for tax purposes in a country with which the Netherlands has not concluded a tax treaty that includes
an article on dividends (not being a Member State of the European Union, Iceland, Norway or Liechtenstein), are generally, subject to the anti-abuse rules and the anti-dividend stripping rules described above, fully exempt from Netherlands dividend
withholding tax if the U.S. resident holder of Shares holds an interest of at least 5% (in shares or, in certain cases, in voting rights) in ICTS or if it holds an interest of less than 5%, in either case where, had the holder of Shares been a
Netherlands resident, it would have had the benefit of the participation exemption (this may include a situation where another related party holds an interest of 5% or more in ICTS).
Taxes on Income and Capital Gains
Holders of Shares Resident in the Netherlands: Individuals
A holder of Shares who is an individual resident or deemed to be resident in the Netherlands will be subject to regular Netherlands income tax on the income derived from Shares
and the gains realised upon the acquisition, redemption and/or disposal of Shares by the holder thereof, if:
(a) such holder of Shares has an enterprise or an interest in an enterprise, to which enterprise Shares are attributable; and / or
(b) such income or capital gain forms “a benefit from miscellaneous activities” (“resultaat uit overige werkzaamheden”) which, for instance, would be the case if the
activities with respect to Shares exceed “normal active asset management” (“normaal, actief vermogensbeheer”) or if income and gains are derived from the holding, whether directly or indirectly, of (a combination of) shares, debt claims or other
rights (together, a lucratief belang) that the holder thereof has acquired under such circumstances that such income and gains are intended to be remuneration for work or services performed by such holder (or a related person), whether within or
outside an employment relation, where such lucrative interest provides the holder thereof, economically speaking, with certain benefits that have a relation to the relevant work or services.
If either of the abovementioned conditions (a) or (b) applies, income derived from Shares and the gains realised upon the acquisition, redemption and/or disposal of Shares will
in general be subject to Netherlands income tax at the progressive rates up to 51.75%.
If the abovementioned conditions (a) and (b) do not apply, a holder of Shares who is an individual, resident or deemed to be resident in the Netherlands will not be subject to
taxes on actual income and capital gains in the Netherlands. Instead, such individual is generally taxed at a flat rate of 30% on deemed income from “savings and investments” (“sparen en beleggen”), which deemed income is determined on the basis
of the amount included in the individual’s “yield basis” (“rendementsgrondslag”) at the beginning of the calendar year (minus a tax-free threshold). For 2020, the deemed income derived from savings and investments amount to 1.80% of the
individual’s yield basis up to EUR 72,797, 4.22% of the individual’s yield basis exceeding EUR 72,797 up to and including EUR 1,005,572 and 5.33% of the individual’s yield basis in excess of EUR 1,005,572. The percentages to determine the deemed
income are reassessed every year. The tax-free threshold for 2020 is EUR 30,846.
Holders of Shares Resident in the Netherlands: Corporate Entities
A holder of Shares that is resident or deemed to be resident in the Netherlands for corporate income tax purposes, and that is:
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another entity with a capital divided into shares;
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a cooperative (association); or
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another legal entity that has an enterprise or an interest in an enterprise to which the Shares are attributable,
but which is not:
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a qualifying pension fund;
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a qualifying investment fund (fiscale beleggingsinstelling) or a qualifying exempt investmentInstitution (vrijgestelde beleggingsinstelling); or
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another entity exempts from corporate income tax,
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will in general be subject to regular corporate income tax, levied at a rate of 25% (16.5% over profits up to EUR 200,000) over income derived from Shares and the gains realised upon the
acquisition, redemption and/or disposal of Shares, unless, and to the extent that, the participation exemption (deelnemingsvrijstelling) applies.
Holders of Shares Resident Outside the Netherlands: Individuals
A holder of Shares who is an individual, not resident or deemed to be resident in the Netherlands will not be subject to any Netherlands taxes on income derived from Shares and the gains
realised upon the acquisition, redemption and/or disposal of Shares (other than the dividend withholding tax described above), unless:
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such holder has an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment (vaste inrichting) or a permanent representative (vaste vertegenwoordiger) in the Netherlands and to
which enterprise or part of an enterprise, as the case may be, Shares are attributable; or
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such income or capital gain forms a “benefit from miscellaneous activities in the Netherlands” (“resultaat uit overige werkzaamheden in Nederland”) which would for instance be the case if the activities in the Netherlands with respect to
Shares exceed “normal active asset management” (“normaal, actief vermogensbeheer” or if such income and gains are derived from the holding, whether directly or indirectly, of (a combination of) shares, debt claims or other rights (together,
a “lucrative interest” (“lucratief belang”)) that the holder thereof has acquired under such circumstances that such income and gains are intended to be remuneration for work or services performed by such holder (or a related person), in
whole or in part, in the Netherlands, whether within or outside an employment relation, where such lucrative interest provides the holder thereof, economically speaking, with certain benefits that have a relation to the relevant work or
services.
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If either of the above-mentioned conditions (a) or (b) applies, income or capital gains in respect of dividends distributed by ICTS or in respect of any gains realised upon the acquisition,
redemption and/or disposal of Shares will in general be subject to Netherlands income tax at the progressive rates up to 51.75%.
Holders of Shares Resident Outside the Netherlands: Legal and Other Entities
A holder of Shares that is a legal entity, another entity with a capital divided into shares, an association, a foundation or a fund or trust, not resident or deemed to be
resident in the Netherlands for corporate income tax purposes, will not be subject to any Netherlands taxes on income derived from Shares and the gains realised upon the acquisition, redemption and/or disposal of Shares (other than the dividend
withholding tax described above), unless:
such holder has an enterprise or an interest in an enterprise that is, in whole or in part, carried on through a permanent establishment (vaste inrichting) or a permanent
representative (vaste vertegenwoordiger) in the Netherlands and to which enterprise or part of an enterprise, as the case may be, Shares are attributable; or
such holder has a substantial interest in ICTS, that (i) is held with the avoidance of Netherlands income tax as (one of) the main purpose(s) and (ii) forms part of an artificial
structure or series of structures (such as structures which are not put into place for valid business reasons reflecting economic reality).
If one of the above-mentioned conditions applies, income derived from Shares and the gains realised upon the acquisition, redemption and/or disposal of Shares will, in general,
be subject to regular corporate income tax, levied at a rate of 25% (19% over profits up to EUR 200,000), unless, and to the extent that, with respect to a holder as described under (a), the participation exemption
(deelnemingsvrijstelling) applies.
Gift, Estate and Inheritance Taxes
Holders of Shares Resident in the Netherlands
Gift tax may be due in the Netherlands with respect to an acquisition of Shares by way of a gift by a holder of Shares who is resident or deemed to be resident of the
Netherlands.
Inheritance tax may be due in the Netherlands with respect to an acquisition or deemed acquisition of Shares by way of an inheritance or bequest on the death of a holder of
Shares who is resident or deemed to be resident of the Netherlands, or by way of a gift within 180 days before his death by an individual who is resident or deemed to be resident in the Netherlands at the time of his death.
For purposes of Netherlands gift and inheritance tax, an individual with the Netherlands nationality will be deemed to be resident in the Netherlands if he has been resident in
the Netherlands at any time during the ten years preceding the date of the gift or his death. For purposes of Netherlands gift tax, an individual not holding the Netherlands nationality will be deemed to be resident of the Netherlands if he has
been resident in the Netherlands at any time during the twelve months preceding the date of the gift.
Holders of Shares Resident Outside the Netherlands
No gift, estate or inheritance taxes will arise in the Netherlands with respect to an acquisition of Shares by way of a gift by, or on the death of, a holder of Shares who is
neither resident nor deemed to be resident of the Netherlands, unless, in the case of a gift of Shares by an individual who at the date of the gift was neither resident nor deemed to be resident in the Netherlands, such individual dies within 180
days after the date of the gift, while being resident or deemed to be resident in the Netherlands.
Certain Special Situations
For purposes of Netherlands gift, estate and inheritance tax, (i) a gift by a Third Party will be construed as a gift by the Settlor, and (ii) upon the death of the Settlor, as a
rule his/her Beneficiaries will be deemed to have inherited directly from the Settlor. Subsequently, such Beneficiaries will be deemed the settlor, grantor or similar originator of the Separated Private Assets for purposes of Netherlands gift,
estate and inheritance tax in case of subsequent gifts or inheritances.
For the purposes of Netherlands gift and inheritance tax, a gift that is made under a condition precedent is deemed to have been made at the moment such condition precedent is
satisfied. If the condition precedent is fulfilled after the death of the donor, the gift is deemed to be made upon the death of the donor.
Value Added Tax
No Netherlands value added tax will arise in respect of or in connection with the subscription, issue, placement, allotment or delivery of the Shares.
Other Taxes and Duties
No Netherlands registration tax, capital tax, customs duty, transfer tax, stamp duty or any other similar documentary tax or duty, other than court fees, will be payable in the
Netherlands in respect of or in connection with the subscription, issue, placement, allotment or delivery of the Shares.
Residency
A holder of Shares will not be treated as a resident, or a deemed resident, of the Netherlands by reason only of the acquisition, or the holding, of Shares or the performance by
ICTS under the Shares.
Documents on Display
We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements,
the Company files reports and other
information with the United States Securities and Exchange Commission (
"SEC"). These materials may be inspected at
the Company's office in Schiphol-Oost, The Netherlands. Documents filed with the SEC may also be read and copied at the SEC's public
reference room at 100 F Street N.E. Room 1580 Washington, DC 20549 USA. For further information please call the SEC at 1-800-SEC-0330. All the SEC filings made electronically by ICTS are available to the public on the SEC
web site at
http://www.sec.gov (commission file number
0-28542). Those reports are also available free of charge at
www.ictsintl.com.
Subsidiary Information
Not applicable
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk - applies to our operations outside the USA. In 2020, approximately 18% of
the Company’s revenues were derived in the United States of America, and
approximately 82% was derived in Europe and the Far East.
The Company is subject to market risks associated with foreign currency exchange rate fluctuations. We do not utilize derivative instruments to manage the exposure to such market risk. As
such, significant foreign currency exchange rate fluctuations can have a material impact of
the Company’s financial position, results of operations, and cash flows.
Interest Rate Risk - We are subject to changes in interest rates based on Federal Reserve actions and general market conditions.
The Company does not utilize derivative
instruments to manage its exposure to interest rate risk. An increase of 1% in the interest rate would have increased
the Company's interest expense for bank loans, convertible notes payable to a related party and other parties, by approximately
$0.3 million in the year ended
December 31, 2020.
Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Not applicable
Item 15. Controls and Procedures
Management's report on internal control over financial reporting
(a) Our management, including our Managing Directors and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(d) and 15d-15(d) of the Exchange Act) as of the end of the period covered by this annual report (the “Evaluation Date”).
Based on such evaluation, the Managing Directors and Chief Financial Officer have concluded that, as of the Evaluation Date,
the Company’s disclosure controls and procedures are
effective.
(b) Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of
the Exchange Act. Our management, including our Managing Directors and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) as of the end of the period covered by this report. Based on that evaluation, our management has concluded that our
internal control over financial reporting was effective as of
December 31, 2020. Notwithstanding the foregoing, there can be no assurance that our internal control over financial reporting will detect or uncover all failures of persons within the
Company to comply with our internal procedures, as all internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
(c) On the evaluation conducted by our Managing Directors and Chief Financial Officer pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act, our management has
concluded that there was no change in our internal control over financial reporting that occurred during the year ended
December 31, 2020 that materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Item 16A Audit Committee Financial Experts
The members of the Audit Committee consist of Philip M. Getter, Gordon Hausmann and Gail F. Lieberman. All members are independent, with no relationship with management. Mr.
Getter and Ms. Lieberman have financial expertise. Mr. Getter is the Chairman of the Audit Committee.
The Company has adopted a Code of Ethics for principal's executive officers and senior financial officers.
Item 16C Principal Accountant Fees and Services
The audit committee has considered whether the provision of these services is compatible with maintaining the principal accountant's independence and has concluded that such
services are compatible. All fees were reviewed and pre-approved by the audit committee (U.S. Dollars in thousands).
| |
|
2020
|
|
|
2019
|
|
|
Audit fees
|
|
$
|
257
|
|
|
$
|
283
|
|
|
Audit related fees
|
|
|
-
|
|
|
|
-
|
|
|
Tax fees
|
|
|
-
|
|
|
|
-
|
|
|
Total fees
|
|
$
|
257
|
|
|
$
|
283
|
|
Substantially all of MHM’s personnel, who work under the control om MHM shareholders, are employees of wholly- owned
subsidiaries of CBIZ, Inc., which provides personnel and various services to MHM
in an alternative practice structure.
Item 16D Exemptions from the Listing Standards for Audit committees
Not applicable.
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
There are no significant differences between the corporate governance practices in the Netherlands and the U.S.
The Company has adopted the U.S. practices.
PART III
Item 17. Financial Statements
See Item 18.
Item 18. Financial Statements
The Consolidated Financial Statements and Financial Statement Schedule of
the Company as of
December 31, 2020 and
2019 and for each of the three years in the period ended
December 31, 2020, including the report of our independent registered public accounting firm thereon are set forth on pages F-1 to F-41.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
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By:
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Name:
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Title:
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Managing Director
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Date:
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By:
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Name:
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Title:
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Managing Director and Chief Financial Officer
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Date:
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2020 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
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F-2
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F-3
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F-4
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F-5 |
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F-6 |
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F-8
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Financial Statement Schedule:
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F-41
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C:
Report of Independent Registered Public Accounting Firm
To the Supervisory Board of Directors and Stockholders of ICTS International N.V. and
Subsidiaries:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ICTS International N.V. and
Subsidiaries (
“Company”) as of
December 31, 2020 and
2019 and the related consolidated statements of operations and comprehensive income (loss), shareholders’ deficit, and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes
and schedule (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of
December 31, 2020
and
2019, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on
the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (
“PCAOB”) and are required to be independent with
respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of
the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex
judgments. We determined that there were no critical audit matters.
(The New York Practice of Mayer Hoffman McCann P.C.)
New York, New York
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See accompanying notes to the consolidated financial statements.
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2019
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2018
|
|
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CASH FLOW FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
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|
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Borrowings (repayments) under lines of credit, net
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$
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(13,091
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)
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$
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8,076
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$
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1,485
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Repayments of convertible notes payable to a related party
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-
|
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(29,572
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)
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(2,381
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)
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Proceeds from a related party
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-
|
|
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1,000
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|
|
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-
|
|
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Repayments of loan payable to a related party
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(1,538
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)
|
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(368
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)
|
|
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(1,100
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)
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Proceeds from loan payable
|
|
|
-
|
|
|
|
-
|
|
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2,288
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|
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Repayment of loan payable
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|
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(1,121
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)
|
|
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(1,120
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)
|
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(1,198
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)
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Proceeds from sale of a subsidiary's preferred shares
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-
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|
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80,000
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-
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Transaction costs
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-
|
|
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(6,054
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)
|
|
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-
|
|
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Increase (decrease) in bank overdrafts
|
|
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(738
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)
|
|
|
(107
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)
|
|
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845
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Net cash provided by (used in) financing activities
|
|
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(16,488
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)
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51,855
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(61
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)
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EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH, CASH EQUIVALENTS AND RESTRICTED CASH
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1,594
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(482
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)
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|
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(247
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)
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INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
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6,229
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38,928
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|
|
|
2,412
|
|
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|
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|
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|
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH BEGINNING OF YEAR
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54,845
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|
|
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15,917
|
|
|
|
13,505
|
|
| |
|
|
|
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|
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|
|
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CASH, CASH EQUIVALENTS AND RESTRICTED CASH END OF YEAR
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$
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61,074
|
|
|
$
|
54,845
|
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$
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15,917
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SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
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Stock issuance as reduction against convertible notes payable to related party
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$
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800
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$
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6,698
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$
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2,570
|
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Sale of investment in White Line as reduction against convertible notes payable to related party
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$
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-
|
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$
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-
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$
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3,500
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
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Cash paid during the year for:
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Interest
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$
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613
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$
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1,963
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$
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836
|
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|
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|
|
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Income taxes
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$
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1,329
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|
|
$
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3,129
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|
|
$
|
1,322
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See accompanying notes to the consolidated financial statements.
NOTE 1 – ORGANIZATION
Description of Business
ICTS International N.V. (
“ICTS”) was registered at the Department of Justice in Amstelveen, Netherlands on
October 9, 1992. ICTS and
subsidiaries (collectively referred to as
“ICTS” or the
"Company") operate in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not generate revenue and contains primarily non-operational expenses.
The airport security and other aviation services segment provides security and other services to airlines and airport authorities, predominantly in Europe and the United States of America. The authentication technology segment provide
authentication services to financial and other institutions, predominantly in the United States of America and Europe.
Liquidity and Financial Condition
Accounting Standard Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern requires a Company’s management to assess an entity’s ability
to continue as a going concern, and to provide related footnote disclosure in certain circumstances, as following:
As of
December 31, 2020 and
2019,
the Company has a working capital of $57,220 and $27,627 and shareholders deficit of $30,485 and $35,685, respectively. During the years ended
December 31,
2020,
2019 and
2018,
the Company incurred income (loss) from continuing operations of $5,402, $(7,253) and $(11,064), respectively, and cash flows provided by (used in) operating activities of $24,232, $(9,092) and $7,416, respectively.
The Company had a line of credit in the Netherlands up to €12,000 ($14,742 as of
December 31, 2020), which expired in March 2021 and additional line of credit in the United States of America
up to $10,000, which will expire in October 2021 (see notes 10 and 22). Additionally,
the Company has a note up to a maximum amount of $3 million with a related party that matures on
January 1, 2022.
The Company anticipates that it will not
need its lines of credit for 12 months from issuance of these financial statements.
The COVID-19 outbreak has developed rapidly in 2020, with a significant number of infections.
The Company is dependent mostly in Europe and the United States of America for its business on the
airline industry. In addition, the decisions taken by various governments have affected economic activity and
the Company’s business as following:
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• |
Decrease of travel by flights, reducing the demand for services the Company provide as part of its Airport Security and other aviation services. As a result, our cumulative revenues of the airport security and other aviation services
in the twelve months ended December 31, 2020 were $86,894 lower than our revenues for the twelve months ended December 31, 2019. Many of the Company’s employees were laid off and / or ordered to stay home. |
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• |
Governments in some of the countries in which we operate have announced the implementation of government assistance measures, which mitigated the impact of the COVID-19 outbreak on our results and liquidity. During 2020, in the
United States of America, the government has approved a payroll support of $13,680 to the American subsidiary of the Company, all of which has been received as of December 31, 2020. Out of this amount the American subsidiary recognized
an amount of $12,672 as reduction of labor expenses for the year ended December 31, 2020. In addition, during the first four months of 2021 additional support up to $15,916 was approved to that subsidiary. In the Netherlands, the
government has approved a support of €17,619 ($21,645 as of December 31, 2020) for the year ended December 31, 2020. The Dutch government extended the support program until June 30, 2021 and might extend it beyond. For the months
January through March 2021, the Company was granted additional assistance up to €4,556. In Germany, the employees are eligible for payroll support up to 60% of the employee’s payroll (on individual basis) in case the employees meet the
support plan requirements. The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. The Company has already applied for this support starting
from April 2020. These available governmental support plans might be extended and/or changed according to the future COVID-19 developments. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 1 – ORGANIZATION (CONTINUED)
Liquidity and Financial Condition (Continued)
|
• |
In the Netherlands wage tax, social security and VAT payments for the period March 2020 till May 2021 were postponed and will have to be paid in 36 installments, starting October 2021. As of December 31, 2020, the Company accumulated
debt of €20,796 ($25,548 as of December 31, 2020) to the Dutch tax authorities. In Germany, the government postponed the payment of the VAT for the period February through April, 2020. The Company accumulated €5,462 ($6,710 as of
December 31, 2020) which will be paid in the second half year of 2021. |
|
• |
Depending on the duration of the COVID-19 crisis and continued negative impact on economic activity, the Company might experience further negative results and liquidity restrains. The exact impact on our activities in the remainder
of 2021 and thereafter cannot be predicted. |
The Company’s business plan, together with the expected governmental support projects income from operations, compliance with all financial covenants, positive cash flows from operations and no
external borrowings for operations. There can be no assurance that management will be successful in achieving its business plan.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The significant accounting
policies are as follows:
Functional Currency
The accompanying consolidated financial statements are presented in United States dollars.
The Company has determined that the functional currency of its foreign
subsidiaries is the local
currency, which is predominantly the Euro. For financial reporting purposes, the assets and liabilities of such
subsidiaries are translated into United States dollars using exchange rates in effect at the balance sheet date. The revenue and
expenses of such
subsidiaries are translated into United States dollars using average exchange rates in effect during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficit called
accumulated other comprehensive loss.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.
The most significant estimates and assumptions included in these consolidated financial statements consist of the: (a) calculation of the allowance for doubtful accounts, (b) determination of
the fair value of stock options, (c) recognition of contingent liabilities (d) valuation allowance of deferred income taxes, (e) determination of goodwill impairment (f) determination of future lease periods of existing lease
contracts, and (g)
determination of interest rates used in order to calculate the present value of the operating lease liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS International N.V. and its wholly-owned and majority-owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents.
Restricted Cash
Restricted cash as of
December 31, 2020 consists of: (a) $3,991 held in bank accounts that serve as cash collateral for outstanding letters of credit and (b) $5,481 held in several bank
accounts in the Netherlands, which is restricted for payments to local tax authorities (see note 5).
Restricted cash as of
December 31, 2019 consists of: (a) $733 held in bank accounts that serve as cash collateral for outstanding letters of credit and (b) $1,760 held in several bank accounts
in the Netherlands, which is restricted for payments to local tax authorities.
The following table provides a reconciliation of cash and restricted cash reported on the balance sheet that sum to the total of the same such amounts shown in the statements of cash flows.
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
51,602
|
|
|
$
|
52,352
|
|
|
Restricted cash
|
|
|
9,472
|
|
|
|
2,493
|
|
|
Total cash, cash equivalents and restricted cash
|
|
|
|
|
|
|
|
|
|
shown in the statement of cash flows
|
|
$
|
61,074
|
|
|
$
|
54,845
|
|
Accounts Receivable
Accounts receivable represent amounts due to
the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for credit losses is based on
historical collection experience, factors related to specific customers and current economic trends.
The Company writes off accounts receivable when determined to be uncollectible and are recognized as a reduction to the allowance for credit
losses. As of
December 31, 2020, and
2019, the allowance for doubtful accounts is $690 and $418, respectively.
Fair Value Measurements
The Company follows Financial Accounting Standards Board Accounting Standards Codification (
“FASB ASC”) Topic 820,
“Fair Value Measurement”. Topic 820 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value should be based on assumptions that market participants would use.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurements (Continued)
In determining the fair value,
the Company assesses the inputs used to measure fair value using a three-tier hierarchy, as follows:
|
Level 1 - |
Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Companies have the ability to access at the measurement date.
|
|
Level 2 - |
Inputs to the valuation methodology include:
|
|
• |
Quoted prices for similar assets or liabilities in active markets;
|
|
• |
Quoted prices for identical or similar assets or liabilities in inactive markets;
|
|
• |
Inputs other than quoted prices that are observable for the asset or liability;
|
|
• |
Inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.
|
Level 3 - |
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Investments
The Company accounts for investments in the equity securities of companies which represent an ownership interest of 20% to 50% and the ability to exercise significant influence, provided that
ability does not represent control, using the equity method. The equity method requires
the Company to recognize its share of the net income (loss) of its investees in the consolidated statement of operations until the carrying value of the
investment is zero.
The Company records investments in the equity securities of privately held companies which represent an ownership interest of less than 20% at cost minus impairment.
Property and Equipment
Equipment and furniture, internal-use software, leasehold improvements and vehicles are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are as follows:
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Years
|
|
Equipment and facilities
|
3-7
|
|
Internal- use software
|
4-7
|
|
Vehicles
|
3-7
|
Leasehold improvements are amortized using the straight-line method over the shorter of the total term of the lease or the estimated useful lives of the assets.
Capitalized Internal-Use Software Costs
The Company capitalizes certain costs incurred in developing internal-use software when capitalization requirements have been met. Costs prior to meeting the capitalization requirements are
expensed as incurred. Costs, such as maintenance and training are also expensed as incurred. Capitalized costs are included in property and equipment, and amortized on a straight-lined basis over the estimated useful life of the software.
Amortization expense, which is included in depreciation expense, amounted to $147, $0 and $0 during the years ended
December 31, 2020,
2019 and
2018, respectively.
Goodwill
Goodwill represents the excess purchase price over the fair value of the net tangible and intangible assets of an acquired business. Goodwill is assessed for impairment by reporting unit on an
annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable.
The Company would record a goodwill impairment charge for the difference between the carrying value and the fair value of the
goodwill, not to exceed the carrying amount of the goodwill. During the years ended
December 31, 2020,
2019 and
2018,
the Company recognized a goodwill impairment of $0, $0 and $1,563, respectively (see note 9).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The
Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If
the Company determines that the carrying value of the asset
may not be recoverable, it measures any impairment based on the fair value of the asset as compared to its carrying value. During the years ended
December 31, 2020,
2019, and
2018,
the Company did not record any impairment charges on its
long-lived assets.
Employee Rights Upon Retirement
The Company is required to make severance payments to its Israeli employees upon dismissal of an employee or upon a termination of employment in certain circumstances. The Israeli pension and
severance pay liability to the employees is covered mainly by deposits made at insurance companies. For its employees who are employed under the Section 14 of the Israeli Severance Pay Law, 1963 (
“Section 14”),
the Company makes deposits with
certain insurance companies for accounts controlled by each applicable employee in order to secure the employees’ rights upon termination. In addition, the related obligation and amounts deposited on behalf of the applicable employees for such
obligations are not presented on
the Company’s consolidated balance sheets, as the amounts funded are not under the control of management of
the Company and
the Company is legally released from the obligation to pay any severance payments to
the employees once the required deposits amounts have been paid.
For employees not under Section 14, severance liabilities are recorded based on the length of service and their latest monthly salary.
The Company’s liabilities for the Israeli employees
amounted to $1,556 and $1,493 as of
December 31, 2020 and
2019, respectively and are included in other liabilities in
the Company’s consolidated balance sheets. The deposits made at insurance companies to cover these liabilities amounted to
$1,391 and $1,264 as of
December 31, 2020 and
2019, respectively and are included in other assets in
the Company’s consolidated balance sheets.
Leases
The standard provides a number of optional practical expedients in transition.
The Company chose to apply the following permitted practical expedients:
Not to reassess its prior conclusions regarding lease identification, lease classification and initial direct costs under the new standard.
Short-term lease recognition exemption for all leases with a term shorter than 12 months. This means, that for those leases,
the Company does not recognize Rights of Use
(
“ROU”) assets or lease liabilities.
Applying the practical expedient to not separate lease and non-lease components for all of
the Company’s leases as a lessee.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Leases (Continued)
Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A lease is a finance lease if it
meets any one of the criteria below, otherwise the lease is an operating lease:
The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
The lease term is for the major part of the remaining economic life of the underlying asset.
The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds
substantially all of the fair value of the underlying asset.
The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of lease term.
Based on the criteria above, all of
the Company's leases are classified as operating leases.
Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term, while the ROU assets are also adjusted for
any prepaid or accrued lease payments.
The Company uses its incremental borrowing rate based on the information available at the commencement date to determine the present value of the lease payments.
The lease term is the non-cancellable period of the lease plus periods covered by an extension or termination option if it reasonably certain that
the Company will exercise the option.
After lease commencement,
the Company measures the lease liability at the present value of the remaining lease payments using the discount rate determined at lease commencement (as long as the
discount rate hasn’t been updated as a result of a reassessment event).
The Company subsequently measures the ROU asset at the present value of the remaining lease payments, adjusted for the remaining balance of any lease incentives received, any cumulative prepaid
or accrued rent if relevant and any unamortized initial direct costs. Lease expenses are recognized on a straight-line basis over the lease term. Lease terms will include options to extend or terminate the lease when it is reasonably certain
that
the Company will exercise or not exercise the option to renew or terminate the lease.
Variable lease payments that depend on an index or a rate
On the commencement date, the lease payments shall include variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate), initially
measured using the index or rate at the commencement date.
The Company does not remeasure the lease liability for changes in future lease payments arising from changes in an index or rate unless the lease liability is remeasured for another reason.
Therefore, after initial recognition, such variable lease payments are recognized in profit or loss as they are incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Convertible Debt Instruments
The Company evaluates convertible debt instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for as a freestanding
derivative instrument or considered a beneficial conversion option. An embedded conversion option is considered to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly
and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both the embedded conversion option and the host instrument is not re-measured at fair value under otherwise
applicable US GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion option would be considered a derivative instrument subject to certain requirements
(except when the host instrument is deemed to be conventional).
When it is determined that an embedded conversion option should not be bifurcated from its host instrument, the embedded conversion option is evaluated to determine whether it contains any
intrinsic value which needs to be discounted from the carrying value of the convertible debt instrument.
The intrinsic value of an embedded conversion option is considered to be the difference between the fair value of the underlying security on the commitment date of the debt instrument and the
effective conversion price embedded in the debt instrument.
Contingent Liabilities
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such
contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements
and (b) the amount of loss can reasonably be estimated.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss
The Company's comprehensive income (loss) consists of
the Company’s net income (loss) and foreign currency translation adjustments. Accumulated other comprehensive loss consist of
the Company’s
accumulated foreign exchange currency translation adjustments.
Stock-Based Compensation
Stock-based compensation to employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately
expected to vest. The compensation expense resulting from stock-based compensation to management and administrative employees is recorded over the vesting period of the award in selling, general and administrative expense on the accompanying
consolidated statements of operations and comprehensive income (loss). Compensation expense resulting from stock-based compensation to operational employees is recorded over the vesting period of the award in cost of revenue.
Stock-based compensation issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the stock-based compensation,
whichever is more readily determinable.
Non-Controlling Interests
The Company’s non-controlling interests represent the minority shareholder’s ownership interests related to
the Company’s
subsidiaries.
The Company reports its non-controlling interests in
subsidiaries as a separate component of equity in the consolidated balance sheets and reports net income (loss) attributable to the non-controlling interests in the consolidated statements of operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Redeemable Non-Controlling Interests
Certain non-controlling interests in a subsidiary are entitled to predefined Exit Rights that, for accounting purposes, constitute a contingent redemption event that is outside of
the Company’s
control. As such, these non-controlling interests are presented as temporary equity between liabilities and equity on
the Company’s consolidated balance sheets.
After initial recognition, at the fair value of the investment less directly attributable transaction costs, the carrying value of redeemable non-controlling interests is adjusted for the
non-controlling interests share in the subsidiary’s profits and Other Comprehensive Income (Loss).
The Company does not adjust the carrying value of the redeemable non-controlling interests to the deemed liquidation values of such shares as
long as the liquidation events triggering the Exit Rights is not considered probable of occurring.
Revenue Recognition
Revenue is recognized when the promised services are performed for our clients, and the amount that reflects the consideration we are entitled to receive in exchange for those services is
determined.
The Company’s revenues are recorded net of any sales taxes.
In order to determine the revenue, we (1) identify the
contract with the client, (2) identify the performance obligations, usually it’s based on the hours spent, (3) determination of the
transaction price, (4) allocation of the transaction price to the performance obligation and (5) we recognize revenue as performance obligation is satisfied.
A performance obligation is a promise in a
contract to transfer a distinct service to the client, and it is the unit of account for revenue recognition. The majority of our
contracts have a
single performance obligation as the promise to transfer the individual services is not separately identifiable from other promises in our
contracts and, therefore, is not distinct.
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
|
Airport Security and Other Aviation Services
|
|
$
|
222,654
|
|
|
$
|
309,548
|
|
|
$
|
329,150
|
|
|
Authentication Technology
|
|
|
25,765
|
|
|
|
23,759
|
|
|
|
16,071
|
|
|
Total revenue
|
|
$
|
248,419
|
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
The following table presents
the Company’s revenues generated from customers by geographical area based on the geographical location of the customers invoicing address:
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
|
Germany
|
|
$
|
119,500
|
|
|
|
48
|
%
|
|
$
|
137,207
|
|
|
|
41
|
%
|
|
$
|
134,646
|
|
|
|
39
|
%
|
|
The Netherlands
|
|
|
58,446
|
|
|
|
24
|
%
|
|
|
97,700
|
|
|
|
29
|
%
|
|
|
121,465
|
|
|
|
35
|
%
|
|
United States
|
|
|
45,305
|
|
|
|
18
|
%
|
|
|
73,719
|
|
|
|
22
|
%
|
|
|
69,548
|
|
|
|
20
|
%
|
|
Other countries
|
|
|
25,168
|
|
|
|
10
|
%
|
|
|
24,681
|
|
|
|
8
|
%
|
|
|
19,562
|
|
|
|
6
|
%
|
|
Total revenue
|
|
$
|
248,419
|
|
|
|
100
|
%
|
|
$
|
333,307
|
|
|
|
100
|
%
|
|
$
|
345,221
|
|
|
|
100
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Airport Security and Other Aviation Services Segment
In the airport security and other aviation services, for performance obligations that we satisfy over time, revenues are recognized by consistently applying a method of measuring hours spent on
that performance obligation. We generally utilize an input measure of time (hours and attendance for specific time framed service like specific flights) of the service provided. Performance obligations are satisfied over the course of each
month and continue to be performed until the
contract has been terminated or cancelled.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client
contracts, using expected costs plus margin, or other observable prices. The price as specified in
our client
contracts is generally considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar client in similar circumstances. Certain client
contracts have variable consideration,
including quality thresholds or other similar items that could reduce the transaction price. These amounts may be constrained and revenue is recorded to the extent we do not expect a significant reversal or when the uncertainty associated with
the variable consideration is resolved. Our variable consideration amounts, if any, are not material, and we do not expect significant changes to our estimates.
Our client
contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of
our clients and services offered. Client payments are typically due in 30 to 60 days after invoicing, but may be a shorter or longer term depending on the
contract. Our
contracts with main customers are generally long-term
contracts, between
two to five years. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
Practical Expedients and Exemptions
Because nearly all our
contracts are based on input measure of time of service provided (as hours or attendance) no exemptions need to be made. We have no
material contracts with material
revenues expected to be recognized subsequent to
December 31, 2020 related to remaining performance obligations.
Revenue Service Types
The following is a description of our revenue service types, including Airport Security, Airline Security, Cargo Security, Other Airport Services, General Security Services and Other.
Airport Security
Staffing or manning for specialized airport security are usually based on long term
contract issued via a public tender procedure. We recognize revenue given the unit of measure (hours)
provided in the given time period and the specific price for specific hours agreed upon in the
contracts. Quality and criteria of staffing are described in the
contracts and are measured in the given time period. Deviations, if any, are
discussed with the customer before invoicing and will be reflected in the invoice showing the approved hours and other cost elements as agreed upon price.
Most
contracts have an hourly rate that reflects an all-in tariff based on a full cost price calculation. In some of the
contracts the hourly rates are split between a component based on hours
and a component based on specific costs in a specific time period but always linked to the service provided in given time period. Revenue is recognized at the time period set in the
contract.
Airline Security
Staffing or manning for airline security are usually based on long term
contracts issued via a public tender procedure. We recognize revenue according to the unit of measure provided (usually
attendance for specific time framed service like specific flights). The time framed specialized security services are in this case are the executed number of flights. When the manning for the security of these flights are delivered,
the Company
invoices the customer according to the agreed flight tariff.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Cargo Security
Staffing or manning for specialized cargo security are usually based on long term
contract, sometimes publicly tendered.
Contracts are based on hourly planned and executed screening services.
Revenue is recognized based on the realized screening hours and contractually agreed upon hourly rate.
Other Airport Services
Airport Services include wheelchair attendants, pre-departure skycaps, bag-runners, agents, guards, charter security screening, janitorial, and cabin cleaning to major U.S. and foreign carriers
in airports throughout the United States of America. Our
contracts may include either single or multiple performance obligations and vary by airport and airline. We recognize revenue given the unit of measure (usually hours) provided in the
given time period and the specific price for specific hours or attendance for specific event, time framed service as agreed upon in the
contracts.
General Security Services
Security Services include providing armed and un-armed guards to private schools and places of worship, video surveillance and patrol.
Contracts for security services generally include only a
single performance obligation. We recognize revenue for security guard services given the unit of measure (hours) provided in the given time period. Revenue from video surveillance and patrol is recognized based upon a fixed monthly rate.
Other Services
Other services include revenues from (incidental) specialized security manning services, training services and ad hoc work performed on and off airports. Revenue is recognized over time as
services are being performed, using the input of service delivered during the time period, according to the contractual agreed price.
Authentication Technology Segment
In the authentication technology segment,
the Company offers authentication services on a cost per click basis, with a minimum yearly commitment which means the customer pays
the Company
according to the higher of (a) number of times the customer used the system in order to authenticate IDs or (b) according to the yearly minimum commitment. According to the agreement with the customers, each chargeable click has an agreed price
and revenue is being recognized accordingly.
Pricing and Reduction to Revenues
We generally determine standalone selling prices based upon the prices included in the client
contracts, using expected costs plus margin, or other observable prices. The price as specified in
our client
contracts is generally considered the selling price as agreed with the customer. Certain client
contracts have variable consideration which are based on quantity of usage. These amounts may be constrained and revenue is recorded to
the extent we do not expect a significant reversal or when the uncertainty associated with the variable consideration is resolved. Our variable consideration, if any, amounts are not material, and we do not expect significant changes to our
estimates.
Our client
contracts generally include standard payment terms acceptable in each of the countries, states and territories in which we operate. The payment terms vary by the type and location of
our clients and services offered. The minimum commitment is usually being paid in advance. Client payments are typically due in 30 days after invoicing, but may be a shorter or longer term depending on the
contract. Our client
contracts are
usually for a one-year period with a renewal option. The timing between satisfaction of the performance obligation, invoicing and payment is not significant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance. Deferred revenues at
December 31, 2020 and
2019 were $2,143 and $1,652, respectively shown as
part of the accrued expenses and other current liabilities and $263 and $268 shown as other liabilities. Revenue recognized for the years ended
December 31, 2020,
2019 and
2018 that was included in the deferred revenue at the beginning of each
year was $1,879, $2,001 and $854, respectively.
Our payment terms vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant.
As part of obtaining
contracts with certain customers in the authentication technology segment,
the Company incurs upfront costs such as sales commissions.
The Company capitalizes these costs
which are subsequently amortized on a straight-line basis over the estimated life of the relationship with the customer.
The Company applies the practical expedient that allows it to determine this estimate for a portfolio of
contracts that
have similar characteristics in terms of type of service,
contract term and pricing. This estimate is reviewed by management at the end of each reporting period as additional information becomes available.
Cost of Revenue
Cost of revenue represents primarily payroll and employee related costs associated with employees who provide services under the terms of
the Company's contractual arrangements, insurance and
depreciation and amortization.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of payroll and related costs.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years ended
December 31, 2020,
2019 and
2018 are $735, $828 and $528, respectively.
Value Added Tax
Certain of
the Company’s operations are subject to Value Added Tax (
“VAT”) applied on the services sold in those respective countries.
The Company is required to remit the VAT collected to the
tax authorities, but may deduct the VAT paid on certain eligible purchases.
Income Taxes
The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities resulting
from a change in tax rates is recognized in the period that
includes the enactment date. A valuation allowance is established when realization of net deferred tax assets is not considered more likely than not.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
Uncertain income tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in
the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Income tax positions taken are not offset or aggregated with other positions. Income tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of income tax benefit that is more than 50 percent likely of being realized if challenged by the applicable taxing authority. The portion of
the benefits associated with income tax positions taken that exceeds the amount measured is reflected as income taxes payable.
The Company recognizes interest related to uncertain tax positions in interest expense.
The Company recognizes penalties related to uncertain tax positions in selling, general and
administrative expenses.
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period.
Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method.
The Company had an income from continuing operations for the year ended
December 31, 2020. Potentially dilutive securities were included in the computation of diluted income per share as the
conversion rate of the convertible note payable to related party was lower than the weighted average computed price of
the Company’s stock for the year 2020.
The Company had a loss from continuing operations for the years ended
December 31, 2019 and
2018. For periods of net loss, diluted loss per share is calculated similarly to basic loss per share
because the impact of all dilutive potential common share is anti-dilutive due to the net losses in 2019 and 2018. Potentially dilutive securities were excluded from the computation of diluted loss per share as the conversion rate of the
convertible note payable to related party was higher than the market price of
the Company’s common stock as of
December 31, 2019 and
2018, and the effect of including them is anti-dilutive.
The following table summarizes the number of shares of common stock attributable to potentially dilutive securities outstanding for each of the periods:
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of convertible notes
|
|
|
|
|
|
|
|
|
payable to related party at a price of $0.40
|
|
|
3,000,000
|
|
|
|
5,000,000
|
|
|
|
-
|
|
|
Shares issuable upon conversion of convertible notes
|
|
|
|
|
|
|
|
|
|
|
payable to related party at a price of $1.50
|
|
|
-
|
|
|
|
-
|
|
|
|
14,731,267
|
|
|
Shares issuable upon conversion of accrued interest
|
|
|
|
|
|
|
|
|
|
|
payable to related party at a price of $0.75
|
|
|
-
|
|
|
|
-
|
|
|
|
11,779,776
|
|
|
Total
|
|
|
3,000,000
|
|
|
|
5,000,000
|
|
|
|
26,511,043
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, restricted cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current
liabilities, income taxes payable, VAT payable, notes payable-banks, long-term loan payable and loan payable to related party approximate their carrying values due to the short-term nature of the instruments. The carrying values of the
convertible notes payable to a related party and other liabilities are not readily determinable because: (a) these instruments are not traded and, therefore, no quoted market prices exist upon which to base an estimate of fair value and (b) there were no readily determinable similar instruments on which to base an estimate of fair value.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.
The Company maintains cash and cash equivalents and restricted cash in accounts with financial institutions in the United States of America, Europe, Japan and Israel. As of
December 31, 2020,
accounts at financial institutions located in the United States of America are insured by the Federal Deposit Insurance Corporation (
"FDIC") up to $250 per institution. As of
December 31, 2020, cash, cash equivalents and restricted cash of
$5,773 is being held in the United States of America, of which $5,523 is uninsured. Bank accounts located in Europe, Japan and Israel, totaling $55,301 as of
December 31, 2020, are uninsured.
The Company renders services to a limited number of airlines and airports through service
contracts and provides credit without collateral. Some of these airlines and airports may have
difficulties in meeting their financial obligations, which can have a material adverse effect on
the Company's consolidated financial position, results of operations and cash flows. To mitigate this risk,
the Company regularly reviews the
creditworthiness of its customers through its credit evaluation process.
Revenue from two customers represented 70% of total revenue during the year ended
December 31, 2020, of which one customer accounted for 48% and the other customer accounted for 22% of total
revenue. Accounts receivable from these two customers represented 47% of total accounts receivable as of
December 31, 2020.
Revenue from two customers represented 69% of total revenue during the year ended
December 31, 2019, of which one customer accounted for 41% and the other customer accounts for 28% of total
revenue. Accounts receivable from these two customers represented 57% of total accounts receivable as of
December 31, 2019.
Revenue from two customers represented 72% of total revenue during the year ended
December 31, 2018, of which one customer accounted for 38% and the other customer accounts for 34% of total
revenue. Accounts receivable from these two customers represented 55% of total accounts receivable as of
December 31, 2018.
Both customers mentioned above, have been principle customers in the last three years.
Risks and Uncertainties
The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic and/or political
instability and trade restrictions). Such risks can cause
the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on
the Company's consolidated
financial position, results of operations and cash flows.
The Company is subject to changes in interest rates based on Central Banks Federal Reserve actions and general market conditions.
The Company does not utilize derivative instruments to manage
its exposure to interest rate risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and Uncertainties (Continued)
Furthermore, as a result of its international operations,
the Company is subject to market risks associated with foreign currency exchange rate fluctuations.
The Company does not utilize
derivative instruments to manage its exposure to such market risk. As such, significant foreign currency exchange rate fluctuations can have a material impact on
the Company's consolidated financial position, results of operations and cash
flows.
Reclassification
Certain amounts have been reclassified in prior years balance sheets and statements of cash flows to conform with current period presentation.
Adoption of New Accounting Standard
On
January 1, 2020,
the Company adopted ASU 2016-13 Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, replacing the incurred loss
impairment methodology under current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The measurement of
expected credit losses under the Current Expected Credit Loss (CECL) methodology is applicable to trade and other receivables, financial assets measured at amortized cost including loans and other instruments.
The Company applies ASC 326 its accrual for doubtful accounts and for financial assets purchased with credit deterioration (PCD) related to its investment in Arrow (see note 6). ASC 326
requires credit losses to be presented as an allowance for credit losses. The remaining noncredit discount will be accreted into interest income at the effective interest rate. As allowed by ASC 326,
the Company elected to maintain a pool of
loans for the purpose of applying the standard, due to similar characteristics of the loans. Management assesses the extent to which fair value is less than amortized cost. The assessment indicates that the present value of cash flows
expected to be collected is less than the amortized cost basis, thus a credit loss exists and an allowance for credit losses is recorded for credit loss. Changes in the allowance for credit losses are recorded as provision for credit loss
expenses. Management estimates the allowance using relevant available information from internal and external sources, relating to past events current conditions and reasonable and supportable forecasts. Historical credit loss experience
provides the basis for the estimation of expected credit losses.
The adoption of ASC 326 did not have a material effect on
the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements
Accounting Standards Update 2019-12
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which simplifies the accounting for income taxes by removing certain
exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard will become effective for interim
and annual periods, beginning after
December 15, 2020, with early adoption permitted. The adoption of this standard is not expected to have material effect on
the Company’s operating results or financial condition.
Accounting Standards Update 2020-01
In January 2020, the FASB issued an update for Investments-Equity Securities (Topic 321) and Investments-Equity method and Joint Ventures (Topic 323). This ASU, among other things, clarifies
that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, for the purposes of applying the measurement alternative in accordance with topic 321
immediately before applying or upon discontinuing the equity method. The amendment is effective for public business entities for fiscal years beginning after
December 15, 2020, including interim periods within that fiscal year. The adoption of
this standard is not expected to have a material effect on
the Company’s operating results or financial condition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 3 – BUSINESS COMBINATION
Acquisition in Sweden
In July 2018,
the Company acquired 100% of the outstanding shares of Detact Security Solution AB. The purpose of the acquisition was to penetrate the Swedish aviation and cargo markets.
Consideration of the acquisition was 9,500 SEK ($1,065 as of the purchase date), of which 6,500 SEK ($729 as of the purchase date) was paid in cash upon the signing of the purchase
contract and 3,000 SEK ($336 as of the purchase date) was held
in escrow for a period of three months or longer in case of disagreement between the parties. As of
December 31, 2018, the funds in the escrow account were not released to the seller as a result of disagreement between the parties.
The acquisition was accounted for as a purchase and accordingly a purchase price was allocated to the assets acquired and liabilities assumed at their fair value.
The following represents the allocation of the purchase price as of the purchase date in SEK and the translation to United States Dollars as of the purchase date:
| |
|
SEK
|
|
|
U.S. Dollars
|
|
|
Cash
|
|
|
663
|
|
|
|
74
|
|
|
Accounts receivable
|
|
|
8,902
|
|
|
|
999
|
|
|
Other current assets
|
|
|
445
|
|
|
|
50
|
|
|
Fixed assets
|
|
|
1,189
|
|
|
|
133
|
|
|
Goodwill
|
|
|
9,005
|
|
|
|
1,010
|
|
|
Other assets
|
|
|
1,039
|
|
|
|
116
|
|
|
Total identifiable assets acquired
|
|
|
21,243
|
|
|
|
2,382
|
|
| |
|
|
|
|
|
|
|
|
|
Notes Payables-banks
|
|
|
4,734
|
|
|
|
531
|
|
|
Accounts Payable
|
|
|
182
|
|
|
|
20
|
|
|
Other current liabilities
|
|
|
5,788
|
|
|
|
649
|
|
|
Non current liabilities
|
|
|
1,039
|
|
|
|
117
|
|
|
Total liabilities assumed
|
|
|
11,743
|
|
|
|
1,317
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
9,500
|
|
|
|
1,065
|
|
Goodwill associated with the new acquisition of Detact Security Solution AB was 9,005 SEK ($1,007 as of
December 31, 2018) and deductible for income tax purposes. The goodwill consists
principally of the expectations of future earnings and profits from expanding this business. In December 2018,
the Company evaluated the goodwill and concluded the goodwill should be fully impaired (see note 9).
Acquisition in Spain
In January 2018,
the Company acquired 100% of the outstanding shares of Abydos Consultores de Sistemas S.L.U. The purpose of the acquisition was to increase
the Company’s activities in Spain.
Consideration of the acquisition was €183 ($226 as of the purchase date), in cash upon the signing of the purchase
contract. The name of Abydos Consultores de Sistemas S.L.U. was changed into I-SEC Aviation Security S.L.
The acquisition was accounted for as a purchase and accordingly a purchase price was allocated to the assets acquired and liabilities assumed at their fair values.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 3 – BUSINESS COMBINATION (CONTINUED)
Acquisition in Spain (Continued)
The following represents the allocation of the purchase price as of the purchase date in Euros and the translation to United States Dollars as of the purchase date:
| |
|
EUR
|
|
|
U.S. Dollars
|
|
|
Cash
|
|
|
29
|
|
|
|
36
|
|
|
Accounts receivable
|
|
|
142
|
|
|
|
175
|
|
|
Fixed assets
|
|
|
88
|
|
|
|
108
|
|
|
Other assets
|
|
|
11
|
|
|
|
14
|
|
|
Goodwill
|
|
|
188
|
|
|
|
232
|
|
|
Total identifiable assets acquired
|
|
|
458
|
|
|
|
565
|
|
| |
|
|
|
|
|
|
|
|
|
Notes payables-banks
|
|
|
11
|
|
|
|
14
|
|
|
Accounts payable
|
|
|
19
|
|
|
|
23
|
|
|
Accrued expenses and other current liabilities
|
|
|
126
|
|
|
|
155
|
|
|
Other liabilities
|
|
|
119
|
|
|
|
147
|
|
|
Total liabilities assumed
|
|
|
275
|
|
|
|
339
|
|
| |
|
|
183
|
|
|
|
226
|
|
Goodwill associated with the acquisition of Abydos Consultores de Sistemas S.L.U. was €188 ($232 as of
December 31, 2018) and is deductible for income tax purposes. The goodwill arising from
this acquisition consist principally of the expectations of future earnings and profits from expending this business. In December 2018
the Company evaluated the goodwill and concluded that the goodwill should be fully impaired (see note 9).
NOTE 4 – DISCONTINUED OPERATIONS
During the year ended
December 31, 2017,
the Company committed to a plan to cease the aviation security operations of its subsidiary in Cyprus.
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
GROSS PROFIT
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Selling, general and administrative
|
|
|
-
|
|
|
|
-
|
|
|
|
289
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
(289
|
)
|
|
Less: Net loss attributable to non-controlling interests
|
|
|
-
|
|
|
|
-
|
|
|
|
123
|
|
|
LOSS FROM DISCONTINUED OPERATIONS ATTRIBUTABLE
|
|
|
|
|
|
|
|
|
|
|
TO ICTS INTERNATIONAL N.V.
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(166
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 5 – PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets are as following:
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Receivable from the Dutch tax authorities (1)
|
|
$
|
12,285
|
|
|
$
|
1,682
|
|
|
Receivable from the German authorities - COVID 19 (2)
|
|
|
1,887
|
|
|
|
-
|
|
|
Dutch Governmental support - COVID 19 (3)
|
|
|
1,068
|
|
|
|
-
|
|
|
Other
|
|
|
3,669
|
|
|
|
3,298
|
|
Total prepaid expenses and other currect assets
|
|
$
|
18,909
|
|
|
$
|
4,980
|
|
|
(1) |
The Company is obligated to hold restricted cash in the Netherlands, which is restricted for payments to the tax authorities. From time to time the Company is allowed to make a request to release the money from the restricted account
into the regular bank account. As part of the process the Company transfers the requested amount to the Dutch tax authorities, who pay it back after a few weeks into the Company’s regular bank account.
|
|
(2) |
In Germany, the employees are eligible for payroll support (see note 1). The Company pays to its German employees their full salary and the Company is being reimbursed by the German government for the payroll support amount. |
|
(3) |
In the Netherlands, the Company is eligible for payroll support (see note 1). |
NOTE 6 – INVESTMENTS
Artemis Therapeutics, Inc.
The Company suspended its use of the equity method to accounting for this investment in 2007 after its investment balance was reduced to zero.
The Company evaluated the stock price of ATMS but as ATMS share price is low, the number of shares that are being traded is low, and as ATMS still does not have any revenue,
the Company
determined that the value of the investment is impaired and accordingly, valued the investment at zero.
Freezone I-SEC Korea Inc.
In April 2018,
the Company signed a Joint Venture Agreement with a South Korean Company in order to establish a Joint Venture Company (
“JVC”) and to provide aviation security and non-security
services in South Korea. Each one of the parties holds 50% (fifty percent) of the JVC’s equity.
The Company uses the equity method for this investment. As of
December 31, 2020,
the Company’s investment is 332,715 KRW ($307). For the years ended
December 31, 2020,
2019 and
2018,
the Company recognized a profit (loss) in its consolidated statements of operations of (17,742) KRW, 105,092 KRW and 133,550 KRW, respectively ($(15), $91 and $124 as of
December 31, 2020,
2019 and
2018,
respectively) from its investment in the JVC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 6 – INVESTMENTS (CONTINUED)
Mesh Technologies, Inc.
In January 2019,
the Company invested an amount of $50 in Mesh Technologies, Inc. (
“Mesh”), a company incorporated in the USA. As of
December 31, 2020, the investment represented 0.4% of the
issued and outstanding share capital of Mesh. Mesh is a technology company providing cross border payments technology by innovating on the existing payment rails of established card networks available in the market. As Mesh is a private,
closely held company, there is no active market for this investment. Therefore,
the Company measures the investment at cost minus impairment.
Arrow Ecology & Engineering Overseas (1999)
In December 2019,
the Company invested an amount of $1,750 in Arrow Ecology & Engineering Overseas (1999) Ltd (
“Arrow”), a limited company incorporated in Israel. Arrow develops and
operates a sustainable green process to recycle mixed and sorted municipal solid waste.
The Company purchased few types of shares representing 23.3% of Arrow’s equity for an amount of $22 and shareholders loans were purchased for a price of
$1,728 ($4,146 stated value less $2,418 allowance for credit losses, which have not changed since the acquisition).
The Company uses the equity method for this investment. During the years ended
December 31, 2020 and
2019,
the Company
recognized its estimated share in Arrow loss in the amount of $775 and $0, respectively, from this investment.
The Company has an agreement with an entity related to its main shareholder, according to which, if the value of the investment decrease, the related party entity has guaranteed to repurchase
this full investment at a minimum amount of $1,750. The guarantee is effective immediately as of the date of purchase and terminates after three years. Some Directors and managers of Arrow are related parties of
the Company.
GreenFox Logistics LLC.
In March 2020,
the Company invested an amount of $100 in GreenFox Logistics, LLC. (
“GreenFox”), a company incorporated in the USA. The investment was done as SAFE investment (Simple Agreement
for Future Equity). GreenFox is an on-demand delivery/moving/transportation company. As GreenFox is a private, closely held company, there is no active market for this investment. Therefore,
the Company measures the investment at cost minus
impairment.
SardineAI Corp.
In August 2020,
the Company invested an amount of $50 in SardineAI Corp (
“SardineAI”), a company incorporated in the USA. In return
the Company received preferred shares representing less than
1% of SardineAI equity. SardineAI is a Fraud Prevention-as-a-Service (FaaS) platform for Digital businesses to detect frauds and financial crimes. As SardineAI is a private, closely held company, there is no active market for this investment.
Therefore,
the Company measures the investment at cost minus impairment.
NOTE 7 - PROPERTY AND EQUIPMENT
|
Property and equipment is as follows:
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Office, equipment and facilities
|
|
$
|
10,796
|
|
|
$
|
8,866
|
|
|
Internal-use software
|
|
|
1,449
|
|
|
|
595
|
|
|
Vehicles
|
|
|
1,958
|
|
|
|
1,870
|
|
|
Leasehold improvements
|
|
|
2,972
|
|
|
|
2,352
|
|
| |
|
|
17,175
|
|
|
|
13,683
|
|
|
Less: accumulated depreciation and amortization
|
|
|
11,650
|
|
|
|
9,097
|
|
|
Total property and equipment, net
|
|
$
|
5,525
|
|
|
$
|
4,586
|
|
Depreciation and amortization expenses are $2,090, $1,688 and $1,897 for the years ended
December 31, 2020,
2019 and
2018 respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 8 - LEASES
Lessee Arrangements
The Company enters into leases in the normal course of business primarily as part of its operations in the different airports, back office operations, research and development offices and
headquarters offices.
The table below presents the effects on the amounts relating to
the Company’s total lease cost:
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
3,914
|
|
|
$
|
3,421
|
|
|
Short-term lease cost
|
|
|
1,580
|
|
|
|
994
|
|
|
Total lease cost
|
|
$
|
5,494
|
|
|
$
|
4,415
|
|
| |
|
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of Lease liabilities:
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
3,962
|
|
|
$
|
2,901
|
|
| |
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
$
|
4,941
|
|
|
$
|
541
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term - operating leases
|
|
4.5 years
|
|
|
4.1 years
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted-average discount rate - operating leases
|
|
|
4.8
|
%
|
|
|
5.0
|
%
|
Supplemental balance sheet information related to operating leases was as follows:
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
Operating lease ROU assets
|
|
$
|
12,938
|
|
|
$
|
10,367
|
|
| |
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
3,531
|
|
|
$
|
2,725
|
|
|
Operating lease liabilities
|
|
|
9,333
|
|
|
|
7,562
|
|
|
Total operating lease liabilities
|
|
$
|
12,864
|
|
|
$
|
10,287
|
|
Future undiscounted lease payments for operation leases with initial terms of more than one year as of
December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
4,048
|
|
|
2022
|
|
|
3,122
|
|
|
2023
|
|
|
2,747
|
|
|
2024
|
|
|
2,194
|
|
|
2025
|
|
|
906
|
|
|
Thereafter
|
|
|
1,400
|
|
|
Total future minimum lease payments
|
|
|
14,417
|
|
|
Less: imputed interest
|
|
|
1,553
|
|
|
Total
|
|
$
|
12,864
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 9 – GOODWILL
All
the Company’s goodwill relates to its airport security and other aviation services segment. The change in goodwill during the year is as follows:
| |
|
2020
|
|
|
2019
|
|
|
Balance as of the beginning of the year:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,182
|
|
|
$
|
2,220
|
|
|
Accumulated impairment losses
|
|
|
(1,501
|
)
|
|
|
(1,525
|
)
|
| |
|
|
681
|
|
|
|
695
|
|
| |
|
|
|
|
|
|
|
|
|
Goodwill acquired during the year
|
|
|
-
|
|
|
|
-
|
|
|
Impairment losses
|
|
|
-
|
|
|
|
-
|
|
|
Exchange rate effect
|
|
|
65
|
|
|
|
(14
|
)
|
| |
|
|
746
|
|
|
|
681
|
|
| |
|
|
|
|
|
|
|
|
|
Balance as of the end of the year:
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,361
|
|
|
|
2,182
|
|
|
Accumulated impairment losses
|
|
|
(1,615
|
)
|
|
|
(1,501
|
)
|
| |
|
$
|
746
|
|
|
$
|
681
|
|
At
December 31, 2020 and
2019,
the Company performed qualitative assessments to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying values,
including goodwill. The qualitative assessments indicated that it was more likely than not that the fair value exceeded the carrying value of the reporting unit. At
December 31, 2018, the qualitative assessment indicated that it was more likely
than not that the carrying value of the reporting unit exceeded fair value.
The quantitative impairment test includes comparing the carrying value of the reporting unit, including the existing goodwill and intangible assets, to the fair value of the reporting unit. If
the carrying amount of the reporting unit exceeds its fair value, a goodwill impairment charge is recorded for the amounts in which the carrying value of the reporting unit exceeds the fair value of the reporting unit, up to the amount of
goodwill attributed to the reporting unit.
The facts and circumstances that led to the impairment of goodwill during the year ended
December 31, 2018 are as follows:
Procheck, a wholly-owned subsidiary of
the Company since 1998 was advised by its only customer, that its services are not required, its
contract would not be renewed and will end on
December
31, 2018, following a change in the governmental security concept in the Netherlands. Upon expiration of the agreement, the employment of its employees was terminated. A goodwill impairment loss of $314 was recognized.
In January 2018,
the Company acquired 100% of the outstanding shares of Abydos Consultores de Sistemas S.L.U (see note 3) and recorded goodwill of €188 ($215 as of
December 31, 2018). The
purpose of the acquisition was to increase
the Company’s activities in Spain. As
the Company did not win any of the main bids on which it participated during 2018, revenue, operating profits and cash flows were lower than expected in 2018. The
earnings forecast for the next four years was revised and an impairment loss of €188 ($222 for the year ended
December 31, 2018) was recognized. The fair value of Abydos Consultores de Sistemas S.L.U. was estimated using the expected present
value of future cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 9 – GOODWILL (CONTINUED)
In July 2018,
the Company acquired 100% of the outstanding shares of Detact Security Solution AB (see note 3) and recorded goodwill of 9,005 SEK ($1,027 for the year ended
December 31, 2018).
The purpose of the acquisition was to penetrate the Swedish aviation and cargo markets. After the acquisition, a major customer has terminated the
contract with
the Company. As a result, the revenue, operating profits and cash flows will be
lower than expected. The earnings forecast for the next four years was revised and an impairment loss of 9,005 SEK ($1,007 as of
December 31, 2018) was recognized. The fair value of Detact Security Solution AB was estimated using the expected
present value of future cash flows.
As
the Company maintains a valuation allowance for the carrying value of its net deferred tax assets for the locations affected by the goodwill impairment, there is no effect on
the Company’s
deferred tax assets in the consolidated balance sheets (see note 18).
NOTE 10 – NOTES PAYABLE – BANKS
United States of America
The Company’s U.S. subsidiary is a party to a credit facility with a commercial lender, which provides a maximum borrowing capacity up to $10,000, subject to a borrowing base limitation. The
borrowing base limitation was equivalent to: (i) 85% of eligible accounts receivable, as defined, plus (ii) 80% of eligible unbilled receivables, as defined, plus (iii) 95% of a $500 standby letter of credit that was provided to the lender by
an entity related to the main Shareholder. Borrowings under the credit facility are secured by the U.S. subsidiary’s accounts receivable, unbilled receivables, equipment, cash and the $500 letter of credit that was provided to the lender by the
Company.
As of
December 31, 2020, and
2019,
the Company had approximately $0 and $6,475, respectively, outstanding under the line of credit arrangement. As of
December 31, 2020 and
2019,
the Company had
$4,144 and $3,525, respectively, in unused borrowing capacity under the line of credit facility.
Borrowings made under the credit facility bear interest, which is payable monthly, at LIBOR plus 3% per annum (3.14% as of
December 31, 2020).
The Company’s weighted average interest rate in the United States of America during the years ended
December 31, 2020,
2019 and
2018 is 4.42%, 5.44% and 6.0% respectively.
The Company is
required to maintain a minimum fixed charge coverage ratio. The credit facility expires in October 2021.
Europe
The Company has a credit arrangement with a commercial bank, to provide it with up to €12,000 ($14,742 as of
December 31, 2020) in borrowings which was renewed in May 2020 through March 2021.
Borrowings under the line of credit bear interest at one-month EURIBOR plus 4.8% with a minimum of 4.8% per annum.
The Company is also subject to unused line fee of 0.75% per annum, which is payable quarterly. The line of credit is secured by
accounts receivable of ten of
the Company’s European
subsidiaries, tangible fixed assets and a bank guarantee of €2,000 ($2,457 as of
December 31, 2020) provided by the parent company, ICTS International N.V. The line of credit cannot exceed
70% of the borrowing base. The line of credit includes certain financial covenants.
In addition to the line of credit arrangement, a guarantee facility of €2,500 ($3,071 as of
December 31, 2020) is provided to
the Company by the same commercial bank, which was also renewed
until March 2021, with an interest of 2.5% per annum and an unused line fee of 0.75% per annum which is payable quarterly. As of
December 31, 2020 and
2019,
the Company had €973 and €2,316 ($1,195 and $2,596 as of
December 31, 2020 and
2019),
respectively, of outstanding guarantees under the guarantee facility, which related to leases and performance guarantees for
contracts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 10 – NOTES PAYABLE – BANKS (CONTINUED)
Europe (Continued)
The line of credit was not renewed and management expects to renew the guarantee facility which will be extended for one year under the same conditions. The guarantee facility is secured by the
accounts receivables of ten of
the Company’s European
subsidiaries.
The Company has an additional credit arrangement in Sweden to provide it with up to 4,000 SEK ($490 as of
December 31, 2020) in borrowings. Borrowings under the line of credit bear annual
interest of 2.8% and subject to annual extension by the financial institution. The line of credit is secured by accounts receivable of the Swedish subsidiary. As of
December 31, 2020 and
2019,
the Company had 1,648 SEK and 1,115 SEK ($202 and
$120 as of
December 31, 2020 and
2019) respectively in outstanding borrowings under the line of credit facility.
NOTE 11 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
Accrued expenses and other current liabilities are as follows:
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Accrued payroll and related costs
|
|
$
|
18,938
|
|
|
$
|
20,662
|
|
|
Accrued vacation
|
|
|
5,582
|
|
|
|
6,639
|
|
|
Labor union contribution
|
|
|
1,440
|
|
|
|
2,089
|
|
|
Deferred revenue
|
|
|
2,143
|
|
|
|
1,652
|
|
|
Payroll support program funding
|
|
|
1,019
|
|
|
|
-
|
|
|
Other
|
|
|
3,765
|
|
|
|
4,153
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
32,887
|
|
|
$
|
35,195
|
|
NOTE 12 – LOAN PAYABLE
In December 2018,
the Company entered into an agreement with a financing company to provide it €2,000 ($2,457 as of
December 31, 2020) as a loan until December 2020. The loan can be repaid
earlier but not before December 2019. The loan bears interest of ten percent per annum. Interest is being paid quarterly. In November 2019,
the Company repaid €1,000 ($1,229 as of
December 31, 2020) of the payable loan plus accrued interest and
in November 2020, the additional outstanding balance of €1,000 ($1,229 as of
December 31, 2020) plus the accrued interest was repaid.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 13 – DEBT TO RELATED PARTIES
Convertible Notes Payable to a Related Party
The Company has an agreement with an entity related to its main shareholder, to provide it with up to $37,000 in revolving loans through
June 30, 2020. The term of the arrangement can be
automatically extended for four additional six-month periods at the option of the holder. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the interest rate of LIBOR plus 7% for
U.S. dollar-denominated loans and
the Company’s European commercial bank interest base rate plus 3% for Euro-denominated loans. The arrangement is secured by a 26% interest in one of
the Company's European
subsidiaries. In connection with the
arrangement, the holder was granted an option to convert the outstanding principal notes payable under the arrangement into
the Company's common stock at a price of $1.50 per share and the unpaid accrued interest at a price of $0.75 per share.
In January 2019, the entity related to the main shareholder converted $2,889 accrued interest into 3,852,364 shares at a price of $0.75 per share.
In May 2019,
the Company granted this entity, the option to convert up to $2,000 of the loan into
the Company’s shares at a price of $0.40 per share, and all other conversion rights for the
balance of the debt except $2,611, which is convertible at a price of $0.75 per share, would eliminate. In December 2019, this entity converted the $2,611 accrued interest into 3,480,968 shares at a price of $0.75 per share. In October 2020,
the entity converted $800 into 2,000,000 shares.
In June 2019, the Board of Directors approved a one-time compensation of $8,139 to this entity for exchange rate and related losses suffered in connection with its convertible notes to the
Company during the years. Compensation was approved subject to closing of investment transaction in
the Company’s subsidiary, AU10TIX Technologies B.V. (
“AU10TIX”, formerly ABC Technologies B.V.), which happened in July 2019 (see note 15). As a
result,
the Company recorded $8,139 in connection with this payment which is included in other expenses in the consolidated statement of operation and comprehensive income (loss).
In July 2019,
the Company repaid $30,000 of the convertible notes.
In October 2020, the loan was extended until January 2022, the loan amount was reduced to $3,000 and the pledge of 26% interest in one of
the Company's European
subsidiaries was terminated.
As of
December 31, 2020 and
2019, convertible notes payable to this related party consist of $1,200 and $2,000, respectively.
Note Payable to Related Party
As of
December 31, 2020 and
2019, notes payable to this related party consist of $0 and $1,538, respectively.
Total interest expense related to these notes is $171, $1,218 and $2,687 for the years ended
December 31, 2020,
2019 and
2018, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 14 – OTHER LIABILITIES
Other liabilities are as follows:
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Severance pay liability
|
|
$
|
1,556
|
|
|
$
|
1,493
|
|
|
Deferred revenue
|
|
|
263
|
|
|
|
268
|
|
|
Deferred VAT
|
|
|
10,319
|
|
|
|
-
|
|
|
Deferred wage tax and social security
|
|
|
13,100
|
|
|
|
-
|
|
|
Other
|
|
|
446
|
|
|
|
-
|
|
Total other liabilities
|
|
$
|
25,684
|
|
|
$
|
1,761
|
|
Deferred VAT and deferred wage tax relates to measurements taken by the Dutch government, on which they postponed all VAT payable for the year 2020 and all wage tax and social security payable
for the months March – December 2020 to be paid in 36 installments starting October 2021.
NOTE 15 – REDEEMABLE NON-CONTROLLING INTERESTS
On
July 3, 2019, AU10TIX entered into a Series A Preferred Subscription Agreement (the
"Agreement") with TPG Lux 2018 SC I, S.a.r.l (
"TPG"), according to which AU10TIX issued 3,000,000 Series A
Preferred Shares (
"Series A Shares") to TPG for a subscription price of US$60,000 in cash representing approximately 24% of the outstanding share capital of AU10TIX and 23.077% of the fully-diluted share capital of AU10TIX (see note 16).
Transaction costs totaled $4,540 and were deducted from the redeemable non-controlling interests balance.
On
November 7, 2019, AU10TIX entered into a Series A and Series A-1 Preferred Subscription Agreement with Oak HC/FT Partners II, L.P. (
"Oak"), according to which AU10TIX issued 1,000,000 Series
A Preferred Shares and 23,622 Series A-1 Preferred Shares (
"Series A-1 Shares" and together with Series A Shares –
"the Preferred Shares") to Oak for a subscription price of US$20,000 in cash representing approximately 7.401% of the outstanding
share capital of AU10TIX and 7.143% of the fully-diluted share capital of AU10TIX. For accounting purposes, the investment was allocated to the Series A and Series A-1 Preferred Shares on a relative fair value basis: $19,537 and $461,
respectively. Transaction costs totaled $1,513 and were deducted from the respective investment amounts.
Following the Oak investment, on
November 7, 2019, TPG subscribed for 307,087 Series A-1 Shares at nominal value (US$0.001 per share) (
“Bonus Issue Series A-1 Shares”) in order to preserve its
23.077% ownership interest in the fully diluted share capital of AU10TIX.
The Preferred Shares Rights
Liquidation Preference: The holders of Series A Shares (“Series A Holders”) are entitled to a liquidation preference upon the occurrence of a sale, initial public offering (“IPO”), merger,
consolidation, reorganization, winding-up, dissolution or liquidation of AU10TIX, pursuant to which the Series A Holders are entitled, on the occurrence of such event and in priority to the ordinary shares, to receive the greater of: (a) an
amount equal to the initial subscription price for the Series A Shares, plus all accrued but unpaid dividends in respect of the Series A Shares, less all dividends previously paid on the Series A Shares, and (b) the proceeds distributable in
respect of the Series A Shares had they been converted into ordinary shares. The initial subscription price for the Series A Shares (and calculations derived therefrom) are subject to customary adjustments as set forth in the agreements
executed in connection with the Sale.
Conversion Rights: The Series A Shares are subject to conversion into ordinary shares of AU10TIX: (a) on the written request by any Series A Shareholder; and (b) immediately prior to a
qualifying IPO of AU10TIX (being an IPO where the net aggregate gross proceeds to AU10TIX exceed US$75 million and where the subscription price per share paid by the public is not less than 150% of the initial subscription price paid for the
Series A Shares). Pursuant to these conversion arrangements, the Series A Shares will convert into ordinary shares on a 1:1 basis (subject to certain agreed upon adjustments).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 15 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
Anti-Dilution Protection: The Shareholders Agreements contain customary broad-based weighted average anti-dilution protection whereby, if further shares are issued by AU10TIX at a price per new
security that is less than the initial subscription price paid for the Series A Shares, then the Series A Holders shall be entitled to receive additional Series A Shares (at no further cost) on a weighted-average basis, reflecting the value of
equity in AU10TIX as determined based on the subscription price paid in the new issue of securities.
Pre-emption Rights: The Shareholders Agreements contain a restriction on issuing any securities ranking senior to or on party with the Series A Shares for as long as TPG and/or any subsequent
investor holds at least one third of the overall number of Series A Shares in issue as at the date of completion of the Sale. In addition, each shareholder holding in excess of 3% of the shares of AU10TIX has the right to participate in any new
issuance of securities by the AU10TIX, subject to customary exceptions.
Exit Rights: At any time from and after the fifth (5th) anniversary of completion of the issuance, upon written request by TPG, AU10TIX is required to use reasonable endeavors to facilitate the
sale by TPG of the Preferred Shares (or, following conversion, ordinary shares) to a third party at a price in excess of 150% of the initial subscription price paid for the Series A Shares and subject to a right of first refusal in favor of the
Company. In the event that, three (3) months thereafter, a sale of the Preferred Shares held by TPG has not been consummated, upon written request by TPG, AU10TIX is required to facilitate a sale of AU10TIX within six (6) months after such
written request, and thereafter, TPG has the right to require AU10TIX to facilitate a sale or IPO of AU10TIX. On the exercise of such rights, each other shareholder (including
the Company) is required to cooperate with TPG regarding such sale
or IPO and TPG has the right to exercise drag rights over the shares held by other shareholders in order to facilitate such exit event.
The Exit Right is part of the issuance of the Series A Shares, and was not entered into separately from the transaction that created the non-controlling interests. The Exit Right is not legally
detachable from the non-controlling interests because it is non-transferrable (i.e., the instrument cannot be transferred without the underlying preferred shares). Thus, the Exit Right would not be separately exercisable from the
non-controlling interests shares because the non-controlling interests shares will be settled when the Exit Right is exercised. As a result, the Exit Right would be considered embedded in the Series A Shares held by TPG.
Shares of redeemable convertible preferred stock are not mandatorily or currently redeemable. However, the Exit Right would constitute a contingent redemption event that is outside of the
Company’s control. As such, Series A Shares have been presented outside of permanent equity as redeemable non-controlling interests.
The Company has adjusted the carrying value of the redeemable non-controlling interests to adjust for the
non-controlling interests share in AU10TIX's profits and Other Comprehensive Income (Loss).
The Company has not adjusted the carrying values of the redeemable non-controlling interests to the deemed liquidation values of such shares since a
liquidation event was not probable at any of the balance sheet dates. Subsequent adjustments to increase or decrease the carrying values to the ultimate liquidation values will be made only if and when it becomes probable that such a
liquidation event will occur.
The Series A-1 Preferred Shares do not entitle their holders to any liquidation or exit rights as the Series A Preferred Shares, and therefore are classified within permanent equity, as
non-controlling interests.
The anti-dilution provisions cited above have not been bifurcated from the host
contract since they are to be settled into AU10TIX's non-traded shares, thus the
"net settlement" criteria is not
met.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 15 – REDEEMABLE NON-CONTROLLING INTERESTS (CONTINUED)
The Preferred Shares Rights (Continued)
The following table sets forth for the movement in the redeemable non-controlling interests:
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
Balance as of the beginning of the year
|
|
$
|
74,300
|
|
|
$
|
-
|
|
|
Sale of AU10TIX Technologies B.V. series A Shares, net
|
|
|
-
|
|
|
|
73,520
|
|
|
Net Income
|
|
|
925
|
|
|
|
774
|
|
|
Other Comprehensive Income - Translation adjustment
|
|
|
97
|
|
|
|
6
|
|
|
Balance as of the end of the year
|
|
$
|
75,322
|
|
|
$
|
74,300
|
|
NOTE 16 – STOCK-BASED COMPENSATION
AU10TIX’s subsidiary has a Stock Option Plan which has reserved 500,000 shares of its common stock for its future issuance. As of
December 31, 2020, the subsidiary has 13,000,000 authorized
shares of which 12,500,000 shares are issued and outstanding. Under the stock option plan, stock options may be granted to employees, officers, directors, consultants and service providers of the subsidiary at an exercise price as determined by
the subsidiary’s board of directors with expiration terms of not more than ten years after the date such option is granted. Options granted under the plan generally vest over a period of four years.
The following is a summary of
the Company’s subsidiary stock options issued and outstanding:
| |
|
Number of options
|
|
|
Weighted average exercise price
|
|
|
Weighted average remaining contractual term
|
|
|
|
|
|
200,500
|
|
|
$
|
0.01
|
|
|
|
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options outstanding , end of the year
|
|
|
200,500
|
|
|
$
|
0.01
|
|
|
6.5 years
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,500
|
|
|
$
|
0.01
|
|
|
6.5 years
|
|
|
Non-vested options consist of the following
|
|
|
|
|
|
|
| |
|
Number of
|
|
|
Weighted average
|
|
| |
|
options
|
|
|
exercise price
|
|
|
|
|
|
43,875
|
|
|
$
|
0.01
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
Vested
|
|
|
43,875
|
|
|
|
0.01
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
$
|
-
|
|
During the years ended
December 31, 2020,
2019 and
2018, there were no compensation expenses related to the issuance of stock option plan.
As of
December 31, 2020,
the Company does not have any unrecognized compensation cost related to stock options granted under the stock option plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 17 – OTHER EXPENSES, NET
|
Other expense is summarized as follows:
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Interest expense to related parties (see Note 13)
|
|
$
|
(171
|
)
|
|
$
|
(1,218
|
)
|
|
$
|
(2,746
|
)
|
|
Interest expense and other bank charges
|
|
|
(901
|
)
|
|
|
(1,479
|
)
|
|
|
(1,261
|
)
|
|
Interest income
|
|
|
178
|
|
|
|
151
|
|
|
|
-
|
|
|
Revaluation and related costs reimbursed to related party
|
|
|
-
|
|
|
|
(8,139
|
)
|
|
|
-
|
|
|
Foreign currency gain (loss)
|
|
|
(254
|
)
|
|
|
148
|
|
|
|
417
|
|
|
Other income (expense)
|
|
|
(140
|
)
|
|
|
19
|
|
|
|
4
|
|
|
Total other expense, net
|
|
$
|
(1,288
|
)
|
|
$
|
(10,518
|
)
|
|
$
|
(3,586
|
)
|
NOTE 18 – INCOME TAXES
|
The components of income (loss) before income tax benefit (expense) from continuing operations are as follows:
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
The Netherlands
|
|
$
|
469 |
|
|
$
|
(11,508
|
)
|
|
$
|
(13,107
|
)
|
|
|
|
|
5,523
|
|
|
|
5,804
|
|
|
|
2,728
|
|
|
Income (loss) before income tax expenses
|
|
$
|
5,992
|
|
|
$
|
(5,704
|
)
|
|
$
|
(10,379
|
)
|
Additionally, tax expenses (benefits) from
subsidiaries in the Netherlands include $(79), $86 and $0, for the years ended
December 31, 2020,
2019 and
2018, respectively, of tax related to
previous years. Tax expenses from
subsidiaries outside the Netherlands include $0, $0 and $224 for the years ended
December 31, 2020,
2019 and
2018, respectively, of tax related to previous years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 18 – INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Operating loss carryforwards
|
|
$
|
16,694
|
|
|
$
|
20,171
|
|
|
Capital loss carryforwards
|
|
|
159
|
|
|
|
148
|
|
|
Allowance for doubtful accounts
|
|
|
110
|
|
|
|
14
|
|
|
Tax credit carryforwards
|
|
|
560
|
|
|
|
560
|
|
|
Accrued expenses and other
|
|
|
774
|
|
|
|
691
|
|
|
Research and development expenses
|
|
|
432
|
|
|
|
-
|
|
|
Total deferred tax assets
|
|
|
18,729
|
|
|
|
21,584
|
|
| |
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment
|
|
|
(115
|
)
|
|
|
(62
|
)
|
| |
|
|
18,614
|
|
|
|
21,522
|
|
|
Valuation allowance
|
|
|
(17,445
|
)
|
|
|
(21,046
|
)
|
|
Deferred tax assets, net
|
|
$
|
1,169
|
|
|
$
|
476
|
|
The ultimate realization of the net deferred tax assets in each jurisdiction
the Company does business in is dependent upon the generation of future taxable income in that jurisdiction during
the periods in which net operating loss carry forwards are available and items that gave rise to the net deferred tax assets become deductible. At present,
the Company does not have a sufficient history of generating taxable income in the
various jurisdictions it does business in, or positive expected core earnings to conclude that it is more likely than not that
the Company will be able to realize its net deferred tax assets in the near future and, therefore, a valuation
allowance was established for the carrying value of the net deferred tax assets, with the exception of few locations, which are currently generating taxable income. A valuation allowance will be maintained until sufficient positive evidence
exists to support the reversal of any portion of the valuation allowance in other jurisdictions.
As of
December 31, 2020,
the Company has net operating losses carry forwards of $32,308 in the Netherlands, which expire in 2021 through 2027. As of
December 31, 2020,
the Company has net
operating loss carry forwards of $19,726 in the United States of America, which will expire in 2026 through 2037. During the year 2021
the Company is expected to get additional amounts as taxable governmental assistance from the United States
government which will have an effect on
the Company’s profitability and the utilization of the net operating loss carry forwards. In Israel,
the Company has net carry forward losses of $6,660 which do not expire. The ultimate utilization of
such net operating loss carry forwards is limited in certain situations.
As of
December 31, 2020,
the Company has capital loss carry forwards of $692 in Israel. Such capital loss carry forwards do not expire and can be offset against future capital gains generated
in Israel.
As of
December 31, 2020,
the Company has $560 in tax credits for the welfare to work and work opportunity programs in the United States of America that expire in 2024 through 2029.
During the years ended
December 31, 2020 and
2019 the valuation allowance increased (decreased) by $(3,601) and $2,568, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 18 – INCOME TAXES (CONTINUED)
The Company's effective income tax rate differs from the Netherlands' statutory rate of 25% as follows:
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Effective loss (income) tax benefit from continuing operations at statutory rate
|
|
$
|
(1,498
|
)
|
|
$
|
1,426
|
|
|
$
|
2,595
|
|
|
Rate differential
|
|
|
610
|
|
|
|
1,024
|
|
|
|
682
|
|
|
Non-deductible expense
|
|
|
(857
|
)
|
|
|
(584
|
)
|
|
|
(565
|
)
|
|
Adjustments to prior year tax losses
|
|
|
(3,604
|
)
|
|
|
(429
|
)
|
|
|
(408
|
)
|
|
Changes in valuation allowance
|
|
|
3,601
|
|
|
|
(2,568
|
)
|
|
|
(2,577
|
)
|
|
Other
|
|
|
1,158
|
|
|
|
(418
|
)
|
|
|
(412
|
)
|
|
Income tax expense from continuing operations
|
|
$
|
(590
|
)
|
|
$
|
(1,549
|
)
|
|
$
|
(685
|
)
|
The Company files income tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the years since 2014 are subject to examination in the Netherlands. In the United
States of America, income tax returns for the years since 2017 are subject to examination. Income tax returns for the tax years since 2015 are subject to examination in foreign jurisdictions.
NOTE 19 - RELATED PARTY TRANSACTIONS
The Company engages the services of a related party to provide certain selling and management services to the authentication technology segment.
The Company incurred expenses of $741, $801 and
$715 for such services for the years ended
December 31, 2020,
2019 and
2018, respectively. As of
December 31, 2020, and
2019 the outstanding balances due for these services were $114 and $191, respectively, included in accrued expenses and
other current liabilities. In addition, since April 2018, the related party serves as a board member of
the Company and was paid an amount of $38, $28 and $15 as board fees, for the years ended
December 31, 2020,
2019 and
2018, respectively.
An entity related to
the Company’s main shareholder provided a letter of credit of $500 to a commercial bank to guarantee a borrowing arrangement on behalf of one of
the Company’s
subsidiaries.
In December 2019,
the Company replaced the letter of credit by its own letter of credit.
The Company engages the services of a related party to provide certain selling services to its authentication technology segment.
The Company incurred expenses of $87, $106 and $110 for such
services for the years ended
December 31, 2020,
2019 and
2018, respectively.
The Company engages the services of a related party to provide internal audit services. As of February 2020, the related party acts as a Managing Director of
the Company.
The Company incurred
expenses of $182, $170 and $155 for such services for the years ended
December 31, 2020,
2019 and
2018, respectively.
The chairman of the board, a related party, receives annual compensation of $50 for his services as chairman. In addition, in 2020,
the Company incurred salary expenses of $125 for the services
he provides to AU10TIX.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 19 - RELATED PARTY TRANSACTIONS (CONTINUED)
In August 2017,
the Company engaged the services of a related party to provide certain selling and administrative services to its authentication technology segment.
The Company incurred
expenses of $0, $39 and $103 for such services for the years ended
December 31, 2020,
2019 and
2018, respectively. In addition, the related party serves as a board member of
the Company, and was paid an amount of $38, $30 and $15 as board fees,
for the years ended
December 31, 2020,
2019 and
2018, respectively.
In May 2018,
the Company engaged the services of a related party to provide certain administration services.
The Company incurred expenses of $118, $98 and $53 for such services for the years
ended
December 31, 2020,
2019 and
2018, respectively.
In May 2019,
the Company engaged the services of Arrow (see note 6) to provide some administrative services.
The Company incurred expenses of $115 and $62 for such services for the years ended
December 31, 2020 and
2019, respectively.
In June 2019,
the Company issued 3,000,000 shares to certain directors and officers of
the Company for a purchase price of $0.40 per share. The Compensation Committee determines the composition
and amount of director and key employee compensation. When the annual award consists of equity purchases, it is only permitted at a price equal or above market.
In December 2019,
the Company purchased shares and shareholders debt of Arrow for $1,750 (see note 6).
In May 2020, an entity related to
the Company’s main shareholder provided a letter of credit of €2,000 ($2,475 as of
December 31, 2020) to a commercial bank to guarantee a borrowing arrangement
on behalf of one of
the Company’s
subsidiaries.
The Company provided to the related party a deposit of $2,200 against the letter of credit which will be paid back to
the Company once the letter of credit will be cancelled.
NOTE 20 - COMMITMENTS AND CONTINGENCIES
Letters of Credit and Guarantees
As of
December 31, 2020,
the Company has $3,991 in outstanding letters of credit. Such letters of credit are being secured by the same amounts in restricted cash with commercial banks (see note
2).
Legal Proceedings
General
The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are
primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable
outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on
the Company's consolidated financial position, results
of operations, or cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 20 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Agency Agreements
In April 2013, prior to the purchase of one of the current
subsidiaries in Europe,
the Company entered into an agency agreement with a third party to assist it with this transaction. According
to the agreement, in the event that the operations in that country are sold in the future, the third-party agent is entitled to a payment of €3,000 ($3,686 as of
December 31, 2020).
In March 2016,
the Company entered into an agreement with a third party to assist
the Company with the possible sale of one of
the Company’s
subsidiaries (see note 15). The fees depend on the
outcome of the assignment and are between 2% - 5% of the sale consideration but not less than $4,000. In February 2019 the agreement was amended. According to the amendment, in case that less than 50% of the voting stock or majority of the
subsidiary assets are being sold the transaction fee will be 5% of the sale consideration but not lower than $3,000.
In August 2017,
the Company entered into an agreement with a third party to assist
the Company with a possible sale of one of
the Company’s
subsidiaries. The fees depend on the outcome of the
assignment and are between 2% - 10% of the sale consideration but not less than € 2,000 ($2,457 as of
December 31, 2020).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 21 – SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) authentication technology. The corporate segment does not generate
revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other aviation services to airlines and airport authorities, predominantly in Europe and the United States
of America. The authentication technology segment provides authentication services to financial and other institutions, predominantly in Europe and the United States of America. All inter-segment transactions are eliminated in consolidation.
The accounting policies of the segments are the same as the accounting policies of
the Company as a whole.
The operating results of these reportable segments are regularly reviewed by the chief operating decision.
| |
|
|
|
|
Airport
Security
and Other
Aviation
Services
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Corporate
|
|
|
|
|
Authentication
Technology
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
222,654
|
|
|
$
|
25,765
|
|
|
$
|
248,419
|
|
|
Depreciation and amortization
|
|
|
72
|
|
|
|
1,302
|
|
|
|
716
|
|
|
|
2,090
|
|
|
Income (loss) from continuing operations
|
|
|
(3,853
|
)
|
|
|
6,056
|
|
|
|
3,199
|
|
|
|
5,402
|
|
|
Goodwill
|
|
|
-
|
|
|
|
746
|
|
|
|
-
|
|
|
|
746
|
|
|
Total assets from continuing operations
|
|
|
12,488
|
|
|
|
86,550
|
|
|
|
41,350
|
|
|
|
140,388
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
309,548
|
|
|
$
|
23,759
|
|
|
$
|
333,307
|
|
|
Depreciation and amortization
|
|
|
46
|
|
|
|
1,328
|
|
|
|
314
|
|
|
|
1,688
|
|
|
Income (loss) from continuing operations
|
|
|
(11,740
|
)
|
|
|
(2,406
|
)
|
|
|
6,893
|
|
|
|
(7,253
|
)
|
|
Goodwill
|
|
|
-
|
|
|
|
681
|
|
|
|
-
|
|
|
|
681
|
|
|
Total assets from continuing operations
|
|
|
23,381
|
|
|
|
64,647
|
|
|
|
35,419
|
|
|
|
123,447
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
329,150
|
|
|
$
|
16,071
|
|
|
$
|
345,221
|
|
|
Depreciation and amortization
|
|
|
45
|
|
|
|
1,756
|
|
|
|
96
|
|
|
|
1,897
|
|
|
Income (loss) from continuing operations
|
|
|
(6,205
|
)
|
|
|
(9,163
|
)
|
|
|
4,304
|
|
|
|
(11,064
|
)
|
|
Goodwill
|
|
|
-
|
|
|
|
695
|
|
|
|
-
|
|
|
|
695
|
|
|
Total assets from continuing operations
|
|
|
329
|
|
|
|
66,373
|
|
|
|
8,385
|
|
|
|
75,087
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE 21 – SEGMENT AND GEOGRAPHICAL INFORMATION (CONTINUED)
The following table sets forth, for the periods indicated, revenue generated from customers by geographical area based on the geographical location of the customer’s invoicing address:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
| |
|
|
|
|
2019
|
|
|
2018
|
|
| |
|
|
|
|
|
|
|
|
|
|
Germany
|
|
$
|
119,500
|
|
|
$
|
137,207
|
|
|
$
|
134,646
|
|
|
The Netherlands
|
|
|
58,446
|
|
|
|
97,700
|
|
|
|
121,465
|
|
|
United States
|
|
|
45,305
|
|
|
|
73,719
|
|
|
|
69,548
|
|
|
Other countries
|
|
|
25,168
|
|
|
|
24,681
|
|
|
|
19,562
|
|
|
Total revenue
|
|
$
|
248,419
|
|
|
$
|
333,307
|
|
|
$
|
345,221
|
|
The following table sets forth, for the periods indicated, property and equipment, net of accumulated depreciation and amortization, by country:
| |
|
|
|
| |
|
|
|
|
2019
|
|
| |
|
|
|
|
|
|
|
Germany
|
|
$
|
449
|
|
|
$
|
516
|
|
|
The Netherlands
|
|
|
598
|
|
|
|
862
|
|
|
United States
|
|
|
305
|
|
|
|
354
|
|
|
Other countries
|
|
|
4,173
|
|
|
|
2,854
|
|
|
Total property and equipmat, net
|
|
$
|
5,525
|
|
|
$
|
4,586
|
|
Property and equipment, net, in other countries include $3,179 and $2,212 property and equipment in Israel, as of
December 31, 2020 and
2019, respectively.
Valuation and Qualifying Accounts
(US $ in thousands)
| |
|
|
|
|
Charges
|
|
|
Charges
|
|
|
|
|
|
|
|
| |
|
|
|
|
to
|
|
|
to
|
|
|
|
|
|
|
|
| |
|
Beginning
|
|
|
Costs and
|
|
|
other
|
|
|
|
|
|
End of
|
|
| |
|
of year
|
|
|
Expenses
|
|
|
accounts
|
|
|
Deductions
|
|
|
Year
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103
|
|
|
|
303
|
|
|
|
(166
|
)
|
|
|
-
|
|
|
$ |
240
|
|
|
|
|
$ |
240
|
|
|
|
261
|
|
|
|
(83
|
)
|
|
|
-
|
|
|
$ |
418
|
|
|
|
|
$
|
418
|
|
|
|
710
|
|
|
|
(438
|
)
|
|
|
-
|
|
|
$ |
690
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for net deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,901
|
|
|
|
-
|
|
|
|
2,577
|
|
|
|
-
|
|
|
$ |
18,478
|
|
|
|
|
$ |
18,478
|
|
|
|
-
|
|
|
|
2,568
|
|
|
|
-
|
|
|
$ |
21,046
|
|
|
|
|
$
|
21,046
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,601
|
)
|
|
$ |
17,445
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Write-off net of recoveries for the allowance for doubtful accounts.
F - 41
